Looking at the VIX over the past few years there were a handful of instances where it broke above 20, and at those times it was relatively brief. Now that we spent the first month of the year almost entirely above this ‘bearish’ level we have seen shifts in the market that are similar to times of severe crisis. Sovereigns are rallying, with some, like the German bunds, going negative out to the 5 year. Riskier bonds and stocks have been taken down by this uncertainty as well creating the question of where the overall economy is going.
This ‘new normal’ is something that will be around for some time. The markets will have to adjust to the realities of diverging policy from central banks and more lumps in data as a result. New things do get old and when uncertainty around the changes in this new environment wanes, we will see asset prices that are oversold and under sold based on the longer term trends.
These longer term trends are going to come from stability in policies around the globe, which we seen far from at this point in time. With elections, a mystery OPEC meeting which always seems to be in the works, and the UK talking about a Brexit; there is still plenty of policy concerns that makes Germany’s negative interest rate seem attractive. In the current environment a calculated loss seems the only certainty you can get.