The Market Is Already Heeding Dalio's Warning on Risk

  • Volatility in stock, bonds and forex markets has bottomed out
  • Small-cap stock decline may signal wider rally is tiring

Mike Wilson, chief U.S. equity strategist at Morgan Stanley, discusses growing calls for caution in the markets and his thoughts on investing. He speaks with Bloomberg's Jonathan Ferro on 'Bloomberg Daybreak: Americas.' (Source: Bloomberg)

As billionaire hedge fund manager Ray Dalio joins a chorus of prominent investors saying it’s time to offload risk, gauges of sentiment show the market is already getting the message.

Investors are no longer serenely sailing from crisis to crisis as politics divides the U.S. at home and isolates it abroad. Volatility is on the rise, bearish options are multiplying and small-cap stocks are tumbling.

More Swings

Across the equity, bond and currency markets, price fluctuations are climbing. The JPMorgan Global FX Volatility index, the Chicago Board Options Exchange’s VIX Index and the Merrill Lynch Option Volatility Estimate are all trending higher, having hit low points in June, July and August respectively. The VIX has risen about 20 percent since July 26.

Option Bears

Trading of bearish options on the S&P 500 Index jumped to a three-month peak last week, and the ratio of outstanding puts to calls climbed to its highest level since January 2016. Back then, equity losses were accelerating toward a two-year low.

Tail Risks

Stocks off record highs and volatility off its lows suggests investors are waking up to market risks, though not necessarily worried about a crash. The Chicago Board Options Exchange’s SKEW Index, which tracks the cost of protection against large price swings, is trending higher though it remains off the highs seen earlier this year.

Small-Cap Distress

The Russell 2000 has fallen for four weeks in a row, and has declined about 7 percent since touching a high in July. Societe Generale SA recommended investors watch this barometer closely for signs of a wider pullback.

Muted Credit

However, not all risk indicators are on the rise. The Markit CDX North American High Yield Index, a credit-default swaps benchmark used to hedge against corporate credit losses remains at just over half the level it reached early last year. Back then, oil falling below $30 a barrel and a slowdown in emerging markets added to investors’ concerns about the state of global economy.

— With assistance by Cecile Vannucci

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