Fasten your seat belts -- it's about to get wild in the market

It’s been a quiet summer in the markets, but that may be about to change.

As we like to make note of in our daily Closing Bell post, the S&P 500 has been on a 34-day streak without moving 1% in either direction. The VIX, which measures the volatility of the stock market, has been declining since the Brexit vote and is in seriously depressed territory. Volume of trading in the market have been incredibly light.

Not for long, according to Joe Amato, chief investment office for equities at Neuberger Berman, in his latest market outlook. With the quiet summer, the market is getting complacent and complacency always comes back to bite investors.

According to Amato, the complacency may be justified given the turbulence of the first six months of the year from the global growth scare in January through the Brexit-related fit in June. The issue is, complacent markets have the tendency to get surprised.

“But complacency is unwise — and not just because all of this could flip around by mid-September,” wrote Amato. “In financial markets, complacency itself can store up danger, increasing vulnerability to unexpected changes in conditions.”

Amato also points to the fact, as we previously noted, that the number of investors shorting volatility — basically betting that the market will stay boring — is at an all-time high. Since the VIX is generally mean-reverting, said Amato, this can only mean that volatility will pick up. Here’s Amato (emphasis added):

Market volatility reverts to its mean, but even taking this into account, periods of unusually low volatility have often preceded bouts of unusually high volatility. Volatility was low just before the dollar came off the gold standard in August 1971, for example; it was low at the beginning of 2007 just before the financial crisis began to unfold; and it was low early in 2011 before the Eurozone crisis erupted. Low volatility didn’t predict events like these, of course, but it created the vulnerability that explains some of the unusually high volatility when those events occurred.”

Amato isn’t really predicting some sort of massive meltdown in the markets, simply illustrating the fact that the quiet has come before the storm in markets many times.

Given the possibility of economic data surprises, uncertainty surrounding the presidential election, possible Fed moves in the back half of the year, and continued geopolitical risks, Amato is convinced that something will catch investors on the wrong foot soon enough.

Or as he concludes, “…investors should make sure their seat belts are fastened.”

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