Stocktake: Have investors become complacent about a US recession?

Recent rally may be close to its end point as investors are ‘overbought and overconfident’

Bullish investors are too complacent, warned high-profile Allianz economist Mohamed El-Erian last week. “People are rushing to say, ‘don’t worry. If we end up in a recession it will be short and shallow.’ I say keep an open mind,” said El-Erian.

Certainly, a US recession looks likely. A recent Bloomberg economist survey found a 65 per cent chance of a recession in 2023. Investors’ current upbeat mood suggests any recession is not expected to be protracted. They may be right, but El-Erian is not alone in detecting hints of complacency.

The Vix, Wall Street’s fear index, has fallen from 34 in October to 20. Datatrek Research notes that this year, the S&P 500 has topped out every time the Vix got to the 20-24 zone. This was the case in early January, early February, mid-April, early June, and mid-August. There is a reason why a calm Vix has been “such a clear signal of an overbought, overconfident market” in 2022, it says. Since 1990, the Vix’s average reading is 20.

Given ongoing uncertainty about US monetary policy and the possibility of recession, says Datatrek, we shouldn’t be at average levels of expected market volatility. “Therefore, when the Vix gets to 20 we know markets have become too complacent,” says Datatrek. The recent rally “may be close to its end point”.

Proinsias O'Mahony

Proinsias O'Mahony

Proinsias O’Mahony, a contributor to The Irish Times, writes the weekly Stocktake column