Credit Suisse Thinks Waning U.S. Stock Volatility Points Towards a Bubble


Relative calm in U.S. stock trading is an indication that the current bull market may end with a bubble, according to Andrew Garthwaite, a global equity strategist at Credit Suisse Group AG.

The attached chart displays a comparison that Garthwaite cited yesterday in a report: between the Chicago Board Options Exchange Volatility Index for stocks, known as the VIX, and the Merrill Option Volatility Estimate, which tracks bonds and goes by the acronym MOVE. Both gauges are based on option prices.

The VIX fell 31 percent for the year through June 10, when the indicator closed at 13.22. During the same period, the MOVE climbed 30 percent to 89.76 as anticipation of interest-rate increases from the Federal Reserve sent bonds tumbling.

“Fear of losing money” in stocks is low enough by this yardstick to set the stage for higher prices, Garthwaite wrote. Declines in a ratio between the actual volatility of stocks and bonds this year point to the same conclusion, the London-based strategist wrote.

Garthwaite put the odds of an equity bubble at 60 percent to 70 percent. He cited central banks’ reluctance to push rates higher, the effects of lower oil prices, the potential for more individual investors to move into equities, and the likelihood that mergers and acquisitions will increase.

Most of the possible warning signs have yet to appear, Garthwaite wrote. He raised his year-end projection for the Standard & Poor’s 500 Index to 2,200 from 2,170 and made an initial estimate for mid-2016 of 2,300.

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