It takes a lot to derail a calm market

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The stock market is about to close out a strong first half of the year, with the Nasdaq up nearly 30% and the S&P 500 sitting on gains north of 13%.?

And with this rally has come a newfound calm in the market. A calm that will likely take more than an economic slowdown or another rate hike to upset.?

The CBOE’s volatility index, known as the VIX, or the “fear index” on Wall Street, measures expected volatility in the S&P 500 and, as such, is seen as a reading of overall stress for stocks.?

All else equal, an elevated VIX tends to correspond to falling – or at least choppy – market conditions. A falling VIX tends to correspond to rising stock prices.?

The VIX has been low lately and falling, with the index standing near 13. For traders, 20 is a level on the VIX that tends to get most people’s attention.

The stresses of the banking crisis that had the index crack into the 20s in March have ebbed, and the Fed’s pause of the rate hikes eased the market’s seat back even further.

And with summer about to be in full swing as we approach the July 4 holiday, the market’s energy has gone full chaise lounge. Perhaps you can see where this is going — we have seen Jaws, we have seen Lake Placid. Whenever things are nice, someone is waiting for the other shoe to drop.

But according to Nicholas Colas, the hedge fund veteran who now runs DataTrek Research , it really does take a giant shark or a crocodile to ruin your summer.?

“Once we’re in a [low-volatility] regime, it tends to last unless a true ‘unknown unknown’ comes along,” Colas writes. “With the VIX well below average now, we look to be in a low-vol/good return environment until a genuine shock comes along.”

In other words, a market can ease into a low-volatility regime as we've seen this year — regimes that almost always see higher S&P 500 returns — but they don't ease out of them. And a meaningful shock would have to be significant.

“It is hard, but not impossible to ‘surprise’ the VIX with new information which switches it from running below trend to suddenly above trend,” Colas writes.?

Over the past 20 years, there have only been a few: the 2008 financial crisis, the 2011 Greek debt crisis, the Covid pandemic in 2022, and 2022’s aggressive rate hikes.??

“This is not a bright green light for further equity gains in 2023,” Colas cautions, “but it does set the bar quite high in terms of what sort of catalyst is needed to derail the current rally.”

—?Ethan Wolff-Mann, Senior Editor at Yahoo Finance