Are Investors Too Complacent?

It’s typically not a good sign when Federal Reserve officials start to raise concerns about investors taking too much risk. But that’s just what they’ve been doing, according to an article this morning in the Wall Street Journal.

William Dudley, president of the Federal Reserve Bank of New York, said in a speech last week that “Volatility in the markets is unusually low. I am a little bit nervous that people are taking too much comfort in this low-volatility period. As a consequence, they’ll take more risk than really what’s appropriate.”.

And this is even after a correction in many glamour stocks this year.

Richard Fisher, president of the Federal Reserve Bank of Dallas said on Tuesday that “Low volatility I don’t think is healthy. This indicates to me a little bit too much complacency that rates are going to stay at abnormally low levels forever.”

Volatility is very low right now. The VIX, a measure of expected stock market volatility, has been below its long-term average of around 20 for 74 consecutive weeks now. That’s its longest such stretch since 2006 and 2007, before the financial crisis.

As you can see in this chart from Credit Suisse, large intraday moves have been scarce too recently:

And it’s not just the stock market that is seeing investor complacency. Risk premiums on bonds are very low right now too. The spread between investment-grade corporate bonds and U.S. Treasurys is the lowest it has been since July 2007. This “reach for yield” has prompted the issuance of a massive amount of junk bonds.

So what do you think? Are you also worried that investors have become too complacent?

Chime in below!