Investors Shouldn’t be Fooled by Market Calm

 Now isn’t the time for investors to get comfortable, says a recent article in The Wall Street Journal.

The underlying economic environment, it says, is “muddier” than it was in January, with some survey data suggesting that growth may have peaked while inflation is “likely to pick up.”

The article suggests that investors should learn from the past market events, specifically the “credit correlation blowup of 2005” when auto makers Ford and General Motors were downgraded to “junk.” While it didn’t have immediate consequences for wider markets or the economy, the article asserts, it was “an early sign in that cycle that investment strategies that rely on conditions persisting can reverse swiftly and unexpectedly.

When Ford and GM ratings were cut, the article explains, investors turned to complex derivative trades to bet that corporate bond prices would track each other. That bet, however, “went badly wrong, as the auto makers’ bonds were slammed, while the rest of the market was steadier.” The same holds true, it argues, for those investors would recently bet that volatility would stay low. “Investors,” it concludes, “should probably take the turbulence seriously. Markets are changing. Now isn’t the time to hit the snooze button.”