It’s been said that the journey is more important than the destination. That enjoying the ride, so to speak, is better than arriving. Apply that same logic to the stock market, and stir in a bunch of recent talk about bubbles and risk tolerance, and some investors think the market we’ve come to know and love over the past six months will not be the market we have for the next six.
“I don’t believe we’re in a bubble; I think stocks can go higher over the next twelve months, but I think what people are missing is the manner in which they go higher,” says Russ Koesterich, chief investment strategist at BlackRock in the attached video. “Specifically, what I think needs more discussion is that it has been a very quiet market.”
That’s right. The man advising the world’s largest asset manager, with more than a trillion dollars under his purview, just effectively told you to stow your tray tables and tighten your seat belts.
“My guess is we’re likely to see volatility rise and more of a bumpy road for stocks. It doesn’t mean stocks won’t have a decent year, but I think that year is going to be accompanied by more volatility,” Koesterich says.
In fact, there are signs and reports that his prediction is already happening, as the CBOE Volatility Index (^VIX, VXX) has suddenly sprung back to life.
And it’s not just volatility, or the absence of it, that has him worried. Koesterich says the bond market is offering clues of its own. Specifically, the narrowing gap, or yield spread, between Treasuries and junk bonds.
“What the spreads are telling me today is that while volatility should be low, it shouldn’t be this low. And that’s one of the warning signals we’re paying attention to,” he says. “Investors are probably being a bit too complacent.”