VIX Shows Economic-Policy Risks Are Overlooked: Chart of the Day

Investors are showing too little concern about the possibility that U.S. stocks will fall victim to an economic-policy debacle, according to Myles Zyblock, chief institutional strategist at RBC Capital Markets.

The CHART OF THE DAY compares the Chicago Board Options Exchange Volatility Index, also known as the VIX, with a policy-uncertainty index developed by professors at Stanford University and the University of Chicago.

The VIX appears to be “a coiled spring,” Zyblock wrote two days ago in a note to clients. The performance gap between the index and the policy gauge shows investors are too focused on rising home and auto sales, falling unemployment and other favorable signs, the Toronto-based strategist wrote.

Yesterday’s 15.57 close for the VIX, based on prices of Standard & Poor’s 500 Index options, trailed an average of 20.67 since calculations started in 1990. The volatility indicator was 42 percent below its high for the year, set on June 1.

The monthly policy gauge reached this year’s peak in November as automatic federal tax increases and spending cuts, identified as the fiscal cliff, loomed larger. Its reading was the highest since President Barack Obama and House Republicans tussled last year over raising the U.S. debt limit.

“A predilection for government can-kicking” hasn’t eliminated the so-called event risk stemming from the fiscal-cliff negotiations and other policy decisions, Zyblock wrote. “And, from our lens, the risk is large.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE