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Lombardi Publishing Corporation (www.LombardiPublishing.com), a 28-year-old consumer publisher that has served over one million customers in 141 countries, is warning that key stock indices remain vulnerable as fear among investors continues to rise.“The stock market has been a risky place to be over the last few months, with the markets climbing higher—almost to the point of irrationality. The euphoria that’s been propping up the stock market is waning,” says economist and lead contributor Michael Lombardi. “In fact, key stock indices are falling: the S&P 500 has almost wiped out all of its year-to-date gains and broad-based fear among investors is rising quickly.”
Lombardi Financial explains that the CBOE Volatility Index (VIX), also referred to as the “fear index,” hit a near-three-year high of 31.06 on October 15 as investors digested a plethora of bad news. This is the first time the VIX has broken through since December 30, 2011.
Investors are increasingly concerned about a growing number of signs pointing to a global economic slowdown, according to Lombardi, particularly in the eurozone (Germany, France, and Spain) and China. The central banks in the United States and England are also cutting back on fiscal stimulus, the fuel that has propelled the stock market higher since 2009.
“In addition to economic uncertainties, investors are also worried about geopolitical tension in the Middle East and Hong Kong, and even the spread of the Ebola virus,” Lombardi adds. “Judging by the VIX index, this uncertainty is not about to let up; while the volatility index has retreated to near 20, it is up 40% since the beginning of 2014 and close to a two-year high.”
The VIX index isn’t the only indicator showing ongoing fear in the stock market. The NAAIM Exposure Index chart, a measure of equity exposure of active money managers—the so-called smart money—is also in sharp decline. Active money managers continue to reduce their exposure to equities as key stock indices fall. On September 2, 82% of their collective portfolios were exposed to the stock market; now, it’s only 33%. This represents a decline of 60% in their equity market exposure, says Lombardi.
Lombardi observes that on the fundamental front, the stock market is constrained as well; U.S. retail sales for September declined 0.3% from August and have been subdued since the beginning of the year. For an economy that gets 70% of its GDP from consumer spending, this data suggests the U.S. economy is slowing. (Source: “Advance Monthly Sales For Retail and Food Services, September 2014,” U.S. Census Bureau web site, October 15, 2014; www.census.gov/retail/marts/www/marts_current.pdf.)
On top of that, the International Monetary Fund cut its global growth forecast for next year to 3.8%, down from its July forecast of four percent. It also said there is a 38% probability the eurozone will reenter recession in the next six months. (Source: Talley, I., “IMF Cuts 2015 Global Growth Forecast to 3.8%,” The Wall Street Journal, October 7, 2014; http://online.wsj.com/articles/imf-cuts-2015-global-growth-forecast-0-2-percentage-point-to-3-8-1412686808.)
“The stock market had a great run over the past five years. While I expected the Dow Jones Industrial Average to more than double from its 2009 low of 6,440 to 13,000 and even 14,000, the Federal Reserve’s historic money printing program fueled the index to 17,000,” Lombardi concludes. “With the current conditions, it appears as though 2014 will be the first time in five years when stock prices have not risen for the year. Is the spike in the volatility index an anomaly, or is it just the beginning?”
Founded in 1986, Lombardi Publishing Corporation, which has served over one million customers in 141 countries, is one of the largest consumer information publishers in the world. For more information on Lombardi Publishing Corporation, visit www.LombardiPublishing.com.
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