The CBOE volatility index closed Monday at the lowest level since December 1993, but BofAML found that Wall Street’s fear gauge should be much higher because of its past correlation to an obscure measure of economic growth.
Demand for commercial and industrial loans, a leading indicator of growth, dipped into negative territory in the first quarter, Merrill Lynch said, citing the latest Federal Reserve Senior Loan Officer survey. Merrill found that periods of low loan demand have in the past been mostly associated with rising volatility, but that’s not happening now.
“It thus appears that the key post-election story continues — i.e. while optimism is high everybody is in wait-and-see mode pending details on tax reform from the new administration,” Hans Mikkelsen, credit strategist at Merrill, said in a note to clients Monday. “The longer this lasts the greater the risk of more weakness in hard data.”
Business and consumer optimism surged after President Donald Trump’s shocking election victory. The jump in optimism contributed to the U.S. stock market’s leap to record highs. The S&P 500 and the Nasdaq composite closed at all-time highs on Monday.
The CBO’s VIX, widely considered the best gauge of fear in the market, ended Monday’s session at 9.77 and was even lower in early trading Tuesday.
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