Investors aren't taking enough risk in the stock market

Investors are taking on too little risk in the stock market as they overthink why it remains calmer than normal, according to BlackRock, the world's largest asset manager with $5.4 trillion in assets under management as of March 31, 2017.

This caution is being reflected in measure of investor fear, such as the CBOE's Volatility Index for the S&P 500, which sits below its historical averages, suggesting to some that the market is too complacent. The VIX on Wednesday was near 10.35, lower than its long-term average of 18.82

Additionally, most traditional measures of valuation are at or above their historical averages, including the Shiller price-to-earnings ratio, implying, at the very least, investors could expect lower returns going forward.

Volatility is likely to stay low for some time, said Richard Turnill, the global chief investment strategist for BlackRock, at a media briefing on Tuesday. Investors became more cautious about investing in risk assets since the financial crisis, Turnill said, and this was worsened by the period of low volatility.

The market's calm is not unusual, Turnill said, and historically persisted for a long time until it was interrupted by a brief crises.

Importantly, today's low volatility environment is associated with a stable economy as is normally the case, Turnill said.

"Many investors, we think, are overly concerned about a change in the volatility regime," Turnill said. If volatility increases, the losses could hit stocks."

Source: Bloomberg

Junior Trader Stefan Panteleev

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