The market has recently experienced record low levels of realized volatility and the VIX™ (volatility index) has fallen to historic lows. Moreover, the incredibly popular FAAMG stocks (Facebook, Apple, Amazon, Microsoft, and Google) have realized tremendous gains – more than tripling the broader market’s 8% return year-to-date. This market activity has been entertaining and many have likened it to the tech bubble of the late 1990s.
Euphoria may be once again taking hold of markets – albeit not necessarily concentrated in specific sectors (e.g., technology or housing). Instead, it seems investors are falling in love with the entire market. The danger this time may stem from so many investors crowding into particular investment products and strategies. Indeed, I believe some of the most popular strategies are creating self-perpetuating flows of capital and significant risk. In my view, the current levels of low volatility and astounding FAAMG performance are just symptoms of a dysfunctional market whereby product mechanics have temporarily displaced investment due diligence and resulted is widespread malinvestment.