Blog: Is Market Optimism a fool's hope?
"There was never much hope. Just a fool's hope . . ." -Gandalf
In the book and movie of the Lord of the Rings, one of the hobbits, Pippin asks Gandalf the wizard if there was ever any hope of Frodo destroying the One Ring so they could vanquish Sauron, the Dark Lord. Gandalf replies, "There never was much hope. Just a fool's hope, as I have been told." While Gandalf was referring to himself as the "fool" since it was his plan, we have to wonder at the extreme optimism which has overtaken the markets in the last couple of weeks.
My primary market sentiment indicators, implied volatilities on the S&P 500, the EuroStoxx and the US Treasury (MOVE) market have all dropped below their thresholds. This signals a low uncertainty environment. In the parlance of the Fractal Market Hypothesis, optimism has returned about the long term. We should see more diversification among investors resulting in lower volatility.
But is this optimism a "fool's hope?" Is it misplaced?