Tags: Blitzer | S&P | risk | Federal Reserve

S&P's Blitzer: Let the Good Times Roll, But Keep a Worried Eye on the Fed

By    |   Thursday, 12 June 2014 11:08 AM

The current U.S. stock market has too much risk-on optimism and not enough risk-off fear of how things could fall apart, according to David Blitzer, chairman of the index committee at S&P Dow Jones Indices.

Blitzer, an expert on the stock market, said the game of market psychology nick-named "Risk On-Risk Off" is nothing new. It refers partly to times when money is easy and interest rates are low, which encourage investors to take risks, and also to times when money is tight and interest rates are rising, which encourage investors to be cautious.

"As the good times roll, markets forget their fears. Forgetfulness leads to Risk On all the time," Blitzer said on his company's Indexology blog.

Editor's Note:
5 Signs Stock Market Will Collapse in 2013

He said the period from 1982 to 2007 of rising stock and bond prices, coupled with low unemployment and benign inflation — an extended risk-on environment — actually set the stage for the 2008 financial meltdown. "Banks became leveraged to the extreme and people borrowed money with no idea of how they would repay the debts."

Blitzer warned of the potential for a replay of that cycle now.

"We may have too much Risk-On optimism and not enough Risk-Off fear today. As widely noted, volatility is very low, VIX [CBOE Volatility Index] seems stuck in the basement and similar volatility measures for non-U.S. equity markets, oil and other investments are similarly low," he wrote.

"Stock prices keep rising, defying both the skeptics and the bears. Common sense suggests that VIX can't fall and the S&P 500 and the Dow can't rise forever — but experience keeps challenging this."

While the S&P 500 could push through the 2,000 level to 2,500 or beyond in the current bull market, Blitzer said it could also crumble or collapse.

A key to what will happen follows from when the Federal Reserve finally takes its pedal off the gas and decides to raise interest rates, which it is bound to do at some point, according to most economists.

"In just about every major reversal of Fed policy, analysts knew it was coming but were surprised (shocked?) when it happened. When the Fed raises interest rates, markets are likely to drop. It could be a bigger bang than the tapering announcement in May 2013," Blitzer predicted.

Nouriel Roubini, the noted New York University economist who accurately predicted the 2008 housing crash and financial meltdown, also believes what the Fed does next could be fateful for the global economy.

Of the six biggest threats Roubini sees to the world economy, CNNMoney reported, two of them involve potential missteps by the U.S. central bank — namely, if the Fed tightens too early, it could prompt a wider downturn, but conversely if it waits too late to normalize rates, it could also cause global economic problems.

In other words, Roubini believes the Fed must somehow thread the needle with perfect timing when it finally reverses its huge monetary stimulus stance. "The risk of a policy mistake in one direction of the other is serious," he said.

Editor's Note: 5 Signs Stock Market Will Collapse in 2013

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The current U.S. stock market has too much risk-on optimism and not enough risk-off fear of how things could fall apart, according to David Blitzer, chairman of the index committee at S&P Dow Jones Indices.
Blitzer, S&P, risk, Federal Reserve
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2014-08-12
Thursday, 12 June 2014 11:08 AM
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