These days, many indicators suggest
we are in an extremely low-risk market environment. The Chicago
Board Options Exchange Volatility Index, or VIX, sometimes known
as the fear index, has reached a five-year low. European
sovereign-bond yields, long a source of anxiety, have eased
since their uncomfortable march higher in 2011, and the euro has
risen 13 percent from its 2010 low.
Options on currencies also suggest little fear in that
market. In the U.S., the Standard & Poor’s 500 Index (SPX) rose 13
percent last year and the average forecast among Wall Street
analysts is for a 9.4 percent gain this year, supported by
growing profits and investor willingness to pay more for each
dollar of earnings. In Europe, bank balance sheets are still
fragile, but the rally in share prices inspired by European
Central Bank President Mario Draghi’s “whatever it takes”
pledge last summer left financial companies in far better shape
to weather turmoil.
To be sure, meaningful progress has been made in escaping
the abyss of systemic risk that enveloped the U.S. in 2008 and
Europe in 2011. But policy makers should avoid the trap of
reading too much into this stable environment. (more)
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