Business Insider

Peter Crabb: Market uncertainty shown in Fear Index

The more we learn the less we know. Wednesday saw another very volatile day on Wall Street, and uncertainty abounds across all markets.

The Dow dropped more than 5 percent, but oil dropped 7 percent and gold prices dropped 4 percent. Where did investors put the proceeds of all these sales?

Cash. U.S. Treasuries rose on Wednesday to further highs.

The return on short-term Treasury bills remains below one-half of 1percent. Even 10-year Treasury debt only pays investors around 3.5percent. When times have been bad in the past, investors have movedtheir money to real assets, such as gold and real estate. That's notwhat we see today.

It's not that times are bad, just uncertain. The increasing uncertaintyis evident in what is known on Wall Street as the Fear Index. The CBOEMarket Volatility index (VIX), an index of stock-option trading from theChicago Board Options Exchange, rose to nearly 70 Wednesday from alow near 16 within the past year.

The index reflects the cost of hedging risk through the sale or purchaseof option contracts on the largest U.S. stocks. This cost rises whenprices move dramatically in one direction or another - reflectinggreater uncertainty over what their price will be in the future. Thenearly five-fold move in the index shows stock market investors havelittle confidence in what the future holds for corporate profitabilityand economic growth.

Despite a $700 billion U.S. Treasury bailout plan and Federal Reserveloans to all sectors of the economy, policy makers continue to look fornew proposals. According to The Wall Street Journal on Thursday, the BushAdministration is considering a new $40 billion plan to help Americanhomeowners avoid foreclosure on their homes.

The head of the Federal Deposit Insurance Corporation (FDIC), SheilaBair, will go before a U.S. Senate committee Thursday and is expected to recommendthe government provide backing that allows banks to renegotiate past-due mortgages. People familiar with the discussions told The WallStreet Journal "there are many ideas under discussion and it's not yetclear which will prevail."

It's no wonder stock market uncertainty has risen to levels never seenbefore in this country. No one knows what to expect today, ortomorrow.

With two weeks until congressional and presidential elections, investorsin stocks and bonds alike prefer to hold cash. Despite a clear frontrunner at this point, there is no telling what policies we can expectfrom the current administration, or even what to expect from a newadministration in January.

Since 2000, Peter R. Crabb has been a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.

  Comments