Monday’s events in Boston were a terrible tragedy. The loss of life was devastating and all of us at BlackRock are praying for the city today. For investors, the news was a tragic reminder that markets still face unknown risks from terrorism and geopolitics, especially considering that there are more than a few trouble spots in the world (the Korean peninsula and Syria to name just two).
In my recent spring outlook piece, I included such “unknown unknowns” as a scenario that could potentially spark a market reversal.
The explosions at the Boston Marathon shortly before the US market close unnerved investors who were already digesting weaker-than-expected Chinese and US growth numbers. All three major US indices tumbled, with the Dow suffering its worst one-day point drop since November.
Despite Monday’s tumble, markets remain vulnerable to shocks – geopolitical as well as economic. While volatility spiked on Monday, it still remains well below the historic average.
This is evident in the recent performance of a critical indicator of market sentiment: the VIX or CBOE Volatility Index (otherwise known as the fear gauge). The index tracks the implied volatility in S&P 500 options. Low levels suggest that investors are feeling sufficiently confident that they are not paying much of a premium to buy insurance – in the form of put options – on the market. In other words, they don’t believe that markets will move much up or down, meaning there’s not likely to be a lot of bad news.