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Tensions with N. Korea Skyrocket Wall Street’s ‘Fear Gauge’

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The Standard & Pooru2019s 500-stock index last week.

On Thursday, August 10, several provocative remarks by President Trump and rising tensions with North Korea seemed to unnerve investors.

According to an article in last Thursday’s New York Times, “The tech-heavy Nasdaq 100 index closed the day down 2.13 percent, and the broader Standard & Poor’s 500-stock index fell by 1.45 percent as investors sold out of such high-flying stocks as Amazon, Facebook and Netflix. It was the sharpest daily decline in the benchmark S.&P. 500 since May 17. Gold held at $1,283.70 an ounce after its strong run of late, and the Nikkei 225 index in Japan steadied from its fall on Wednesday, closing at 19,730. The relative safety of United States Treasury securities continued to appeal, with the yield on the 10-year note falling to 2.20 percent from 2.25 percent on Wednesday. (Yields and prices move in opposite directions from each other.)”

A jump in the VIX, the Chicago Board Options Exchange Volatility Index, was at the root of the nervousness of investors. The index measures the expectations that investors have for sharp moves in the stock markets future, and is known as Wall Street’s fear gauge.

On Thursday, August 10, the VIX went from historically low levels to its highest close since November’s Election Day, 16.04, which was an incredible increase of 44 percent. For most of this year the index remained in single digits, which was fairly unusually low. 

The NYT reports, “The index’s long period of placidity amid constant upheaval in Washington has posed a persistent riddle for Wall Street prognosticators. Some analysts warned that expectations of low volatility had lured a rush of recent investment, particularly from retail investors piling into exchange traded funds tied to the S.&P. 500, the Nasdaq and other indexes and strategies. A sharp upward trend in the VIX could well prompt many of those newcomers to flee at the same time, which could turn a market downturn into something more severe. The potential risks extend beyond those who are new to the party. In recent years, hundreds of billions of dollars have flowed into risk parity and other machine-driven funds that are programmed to start selling stocks and bonds once volatility rises sharply.”

During this time of low interest rates and slow investing, investors have begun to favor automated funds that give low returns but do so consistently.

Julian Brigden of the Colorado-based independent research company Marco Intelligence 2 Partners, which advises big management firms on global investments, said, “By definition, investors tend to be long the most risk when volatility is at its lowest levels. So the question is: How much more volatility do we need to see before funds start to disgorge assets mechanically?”

By Rachel Shapiro

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