Here’s the S&P 500 over the past five days — days which have included not only the massive Greece downgrade by Moody’s, but also big new developments on the BP front: the oil spill might be up to 60,000 barrels a day, it’s setting up a $20 billion fund for claims, and is suspending its dividend.
At the end of all that, the stock market has managed to put on about 4%, in a relatively steady and non-volatile manner. That doesn’t mean that the news was good, of course: it wasn’t. It just means that the market is doing what markets are meant to do: anticipating bad news, pricing it in, and not panicking when it happens. Even BP shares are higher now than they were a week ago.
This says to me that volatility is falling and is likely to fall further, and that equities are beginning to look more like a coherent reflection of the underlying value of companies, and less like an insane casino. Insofar as there’s still craziness out there, it’s where it should be, in the high-risk margins. Look at the action in BP CDS, for instance: they spiked to 617bp today from 494bp on Tuesday, with total outstandings rising sharply to $1.67 billion from $1.28 billion a week ago.
So right now I’m less averse to investing in stocks than I was back in May. I’m still not sure that there’s an equity premium, but the insanity does seem to have abated for the time being. I’m not saying you should buy stocks, necessarily, but I’m less keen on selling them than I was back then.
I’m pretty sure that picking the direction of volatility is only slightly less foolish than picking the direction of markets. Better to look where we are than to guess where we’re going.
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