In our April Monthly Market Commentary, we opened with the following:

Why does the back of our neck itch right now? The economy seems to be doing fine, the stock market is booming, earnings are solid, inflation is non-existent, interest rates remain low, and global central banks remain accommodative.

All of the “signals” we’ve been focusing on in the past several months remain solidly “in the green”. So why are we apprehensive? Perhaps we shouldn’t be, and simply are falling prey to our inner “Chicken Little” who always thinks the sky is falling. We’ve been guilty of that before.

We think complacency is the root of our itch. Market volatility once again has become somnambulant, with the VIX trading below 15% since February (the historical norm is closer to 20%). The markets seemingly are ignoring geopolitical issues (trade tensions, Brexit, Italy, France, North Korea, etc.) and are trading in a very “Candide-ish” manner (“All is for the best in this the best of all possible worlds”). Nothing is moving the needle.

And that’s what’s bugging us. Nothing is moving the needle – the markets just keep trading higher. We hated the days when market movement revolved around Fed policy announcements – when bad news was good news because the Fed would ride to the rescue – but we seem to be back in that mode.

Well, at least for now, that complacency has evaporated. Consider the recent path of the VIX, a common measure of volatility. You notice two things right away: (1) the recent spike up over the past two weeks, but also (2) how low volatility had been in the previous several months – essentially, since the beginning of the year (at least compared to historical averages):

In essence, the market had been pricing in no risk to the current market rally. We’ve been suggesting for months that investors focus on market signals – which to us means (1) Economic Growth, (2) Earnings, (3) Inflation, (4) Interest Rates, and (5) Central Bank Policy.

All of these signals suggest we remain in pretty good shape – perhaps decelerating with respect to economic growth and earnings, but still fairly solidly “in the green”.

We also have been suggesting that, unfortunately, many investors focus too much on market noise, which we define as transitory events that can disrupt markets in the short-term but generally do not have long-lasting effects.