Volatility
Here’s the big one. Volatility makes stock investors less interested in holding stocks. It also increases the risk of owning stocks in the future. Both of those things translate into a lower P/E ratio. How much? The VIX index, which measures stock market volatility, averaged 11 last year. This year the average has risen to nearly 17, though it has been about 35 recently. The VIX is measured in percentage points. So, all else being equal, a 6 percentage point higher VIX should translate into a stock market that is 6 percent lower.
Add it all up, and stock market values could have reasonably been expected to fall about 19.5 percent since mid-September. After Wednesday’s rally, they are 5 percent above that level. Like sell-offs, stock market rallies do feed on themselves. So stocks could continue to rise, but there is no reason to count on that. The stock market does not appear to be undervalued, and it certainly couldn’t be considered a “tremendous buy.” That also means that in this as in so many other things, Trump’s judgment is flawed.
This opinion piece was provided by Bloomberg News.