Just how complacent and sanguine are equities ahead of the Dutch elections and the Fed?
Well, we’re glad you asked.
If you’re long heading into Wednesday, you might want to think really, really hard (although I guess it’s a little late to be telling you this) about the following out Tuesday evening from Goldman…
The S&P 500 has now increased for more than a year without a 10% drawdown and has had 67 consecutive trading days with 1-month realised volatility below 10%. In fact realised 1-month S&P 500 volatility is at 6.83%, which is the 7th percentile since 1928.
Equity valuations are at their cycle highs and nearing Tech Bubble levels but realised volatility is close to multi-year lows. Investors are increasingly wondering how long this gap can last and if equities will continue their low volatility uptrend. High equity valuations alone are not a reason for drawdowns in the short term, if they reflect stable or improving macro conditions; but they indicate elevated drawdown risk.
Goldman’s subtle reminder with regard to stretched valuations and subsequent drawdowns: “big trees fall hard.”