The more we learn the less we know.
The financial markets have had time now to review plans from European leaders for an end to the crisis there. The market response suggests that there is no end in sight.
On Monday, following the summit in Brussels, uncertainty abounded across global financial markets. The Dow dropped more than 1 percent, the London exchange was down 1.8 percent, Germany's stock market fell 3.4 percent, and France's was off 2.6 percent. Clearly, investors doubted how well these measures will fix the euro zone's debt crisis.
Investors turned once again to where they like to go in times of uncertainty: cash. Short-term US Treasuries rose to further highs. Even real assets like gold and oil fell.
The return on short-term Treasury Bills is near zero. In such an uncertain environment, investors would much rather hold financial assets with no return then invest in long-term assets.
Even long-term Treasury notes and bonds found new buyers despite continued questions over how the U.S. government will pay its own bills. Both the 10-year notes and 30-year bond rose in price. Bond prices move inversely to yields, bringing the return on these securities to less than 2 percent and just over 3 percent, respectively.
With good news about holiday spending and a sharp reduction in the most recent unemployment numbers, one would expect the financial markets to be improving. But it’s not that times are bad, just uncertain.
The increasing uncertainty is evident in what is known on Wall Street as the Fear Index. The CBOE Market Volatility (VIX), an index of stock option trading from the Chicago Board Options Exchange, has been elevated since the summer. Between the first of the year and August, the VIX traded between 15 and 20, but has since traded between 25 and 35.
The index reflects the cost of hedging risk through the sale or purchase of option contracts on the largest U.S. stocks. This cost rises when prices move dramatically in one direction or another, reflecting greater uncertainty over what their price will be in the future. The sustained higher level in the index shows stock market investors have little confidence in what the future holds for global growth.
Volatility in stocks of local interest remains high as well. Despite resolving last month what could have been a very costly legal dispute, the implied volatility in the stock of Boise's Micron Technology Inc. has stayed high. At 66 percent, uncertainty in Micron’s outlook is unchanged since September.
Perhaps it is no wonder the stock market is volatile. No one knows what to expect today or tomorrow. The European plan seems to have done little to address the underlining causes of the debt problems in many member countries.
Government leadership in the U.S. is also missing. With close to a year until congressional and presidential elections, investors in stocks and bonds alike prefer to hold cash.
European and U.S. elections may sort things out, but we haven’t learned much yet.