Low Market Volatility – Opportunity Or Warning?

Markets were in turmoil last summer after Fed chairman Ben Bernanke said the central bank would be scaling back its bond-buying program as the U.S. economy improved. Now, the financial seas seem becalmed. The Month in Charts highlights potential weather warnings – and opportunities.

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Halfway through the year, markets appear to be snoozing, this Reuters story notes. Measures of financial volatility are sinking while world market indices rise to within two percent of the highs set in November 2007. Treasury bond volatility is at half the peaks seen a year ago. In the currency markets, implied volatility in the euro/dollar exchange rate is at its lowest since 2007.

Could this be the calm before the storm? China’s economic engine is sputtering and the European Central Bank is still in easing mode. More than one outlook says multiples are historically way overvalued, markets overstretched and stocks ripe for a big fall.

Former U.S. Treasury Secretary Larry Summers sees “secular stagnation” with rock bottom interest rates before the U.S. economy hits full employment.

Such a sluggish environment makes the hunt for yield more complicated. Investors in junk bond funds might want to pick some that are heavily invested in equities, according to this Reuters story.

Fidelity Investments junk bond fund manager Mark Notkin said the earnings yield of stocks in the S&P 500 Index is now about 6.25 percent — better than the 5.2 percent yield of junk bonds.

Earnings yield is the inverse of a stock’s price-to-earnings ratio and shows the percentage of each dollar invested in the stock that was earned by the company. It’s calculated by dividing the earnings per share for the most recent 12-month period with the current market price per share.

The earnings yield on S&P 500 stocks has been beating junk bond yields ever since the beginning of the economic recovery, with some of the most pronounced gains coming in May, according to Reuters data.

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