Stock Market Insights: The trap of calm markets - what every investor should know

Dr. Richard Baker, AIF®, is the CEO and executive wealth advisor at Fervent Wealth Management.

My daughter and her husband were on a jet ski on the lake last weekend. They were doing fine until she made a sharp turn and forgot to tell him. She leaned one way and he leaned the other, and before they knew it, they flipped the jet ski. Hopefully, the market doesn’t take an unexpected turn and roll some investors along the way.

Market volatility, which is just a fancy way of saying market swing, is currently sitting at unusually low levels. Investors use volatility reports to measure market risk and watch for market uncertainty or instability. Following a historic surge in volatility around President Trump’s April 2 tariff announcement and market uncertainty that followed it, markets have reset, and this shift is now showing up in volatility reports.

Over the past few months, volatility has not just declined — it has pretty much collapsed. Wall Street’s fear gauge, the CBOE Volatility Index (VIX), an options-based indicator, is down to 17, from this year's high of 52 on April 8. The VIX measures volatility in the S&P 500 and is currently below its five-year average.

It's not just U.S. stocks, the ICE BofA MOVE Index, which measures bond market volatility, fell to its lowest level in over three years last week. In foreign exchange markets, the Deutsche Bank Currency Volatility Indicator (CVIX Index) — a gauge of volatility in the major currencies — dropped to its lowest level in nearly a year.

Volatility is a moving target and usually doesn't stay low or high for long — it tends to bounce back toward normal over time. So, when the volatility stays unusually low for a while, it often means a big move could be coming. This is because investors get lax and assume the current conditions will last, and the market ends up surprising them. Historically, when volatility is low, investors often take on more risk, reduce their hedges, and stretch for yield — all under the assumption that market calm will persist. But when volatility inevitably returns, and it always returns because it is part of the natural market cycle, it tends to do so abruptly, catching investors off guard and triggering quick knee-jerk sells to get out of the market quickly.

With volatility now at low levels and markets entering the historically volatile season of August to October, investors should be prepared for the potential increase in market volatility. It's hard to say what could be the catalyst. Still, there are several contenders, such as the Russia/Ukraine war, the China tariff negotiation, a political surprise, or a big unexpected shift in the market itself.

Whatever the catalyst, the conditions seem ripe: depressed volatility, stretched positioning/sentiment, and a time of year that is known for surprises. Long-term investors may have an opportunity to buy the dip. The market, though unpredictable, does have seasons. Often, seasonal tailwinds turn into headwinds in August, which is why volatility could ramp up for stocks in August and September. I have plans to take advantage of this opportunity in the accounts I manage.

My daughter and son-in-law were fine, as was the rented jet ski. She laughed and said, “Well, at least we know the kill switch works!” I just thought to myself, I’m glad it was them and not me because I’m too old to be thrown across the lake.

Have a blessed week!

www.FerventWM.com

Securities and advisory services are offered through LPL Financial, a registered investment advisor and member of FINRA/SIPC.

Opinions voiced above are for general information only and not intended as specific advice or recommendations for any person. All performance cited is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested in directly.

The economic forecast outlined in this material may not develop as predicted and there can be no guarantee that the strategies promoted will be successful.

Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.