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Dow Teeters as Strategists Advise Investors to Ignore ‘Black Swan’ Index Warning

Last Updated September 23, 2020 1:23 PM
Josiah Wilmoth
Last Updated September 23, 2020 1:23 PM
  • The Dow fell slightly in response to weaker-than-expected economic data.
  • The stock market’s ‘Black Swan’ index is nearing its highest mark since 2018’s fourth-quarter sell-off.
  • JPMorgan says to ignore the apocalyptic warnings and double down on stocks.

Between the trade war, a global economic slowdown, and an upcoming presidential election, markets have plenty to worry about. So with the Dow Jones Industrial Average and S&P 500 ranging near all-time highs, it’s understandable if cautious investors feel an urge to do a little doomsday prepping in their portfolios.

But should they? We’ll examine what strategists are saying. First, though, let’s take a look at what’s going on in the stock market today.

Dow, S&P 500, and Nasdaq All Trade Cautiously

On Thursday, the US stock market remained relatively quiet, though soft economic data contributed to slight declines across Wall Street’s major indices.

President Donald Trump is expected to meet with his trade team today  to hash out whether to hike tariffs on Sunday, and neither the Federal Reserve nor the European Central Bank shocked investors with any unexpected policy actions this week.

dow jones industrial average chart
The Dow fell a couple of dozen points on Thursday. | Source: Yahoo Finance 

The Dow Jones Industrial Average dipped 36.49 points or 0.13% to 27,874.81.

The S&P 500 fared slightly better, edging 1.89 points or 0.06% lower to 3,139.73.

The Nasdaq was last down 14.58 points or 0.17% at 8,639.47.

The gold price, meanwhile, rose nearly 1%, nudging ever closer to the $1,500 handle.

‘Black Swan’ Index Spikes, but JPMorgan Says to Double Down on Stocks

Ah, gold. The safe-haven asset loved by libertarians and loathed by central bankers. This year’s stock market rally hasn’t taken the shine off the yellow metal, and we’ve seen a renaissance of articles profiling the proclivity of the ultra-rich to “hoard it in secret bunkers.”

Those bunkers must not be quite full yet, because Goldman Sachs recently predicted that the gold price would surge another 9%  by March 2020. And you can bet that inflationary $10 bill in your pocket that you’ll see plenty of headlines like “‘Black Swan’ index flashes yellow ” making the rounds on goldbug forums today.

According to Reuters, that “Black Swan index” – more accurately known as the Cboe Skew Index .SKEWX – has climbed toward a 14-month high.

cboe skew index, stock market black swan index
The stock market’s “Black Swan” index is nearing its highest level in 14 months. | Source: Yahoo Finance 

Similar to the more widely followed VIX, the Skew Index tracks implied market volatility. But unlike the VIX, these options measure implied tail-risk, meaning that they really only come into play if the stock market experiences a wild swing.

Earlier this week, the Skew Index jumped to 136.56, its highest mark since October 2018. What happened to the stock market in October 2018? This:

dow jones industrial average chart
The last time the Skew Index was this high, the Dow Jones and broader stock market suffered a steep sell-off. | Source: Yahoo Finance 

Still, as Reuters notes, many analysts remain skeptical that the Skew Index is a reliable indicator of a coming stock market crash. It’s averaged nearly 130 over the past six years, even as the Dow, Nasdaq, and S&P 500 have all raced higher. Volatility is cheap, and it allows traders to hedge against risk events – however unlikely they may be.

But according to JPMorgan, now is not the time for investors to hedge their bets . Writing in a note to clients this week, a team of JPMorgan strategists advised investors to go long on stocks in 2020.

What about gold? Short it.

Dow Ticks Lower After US Economic Data Comes in Soft

Last week’s blowout jobs report painted an extremely bright picture of the US economy, but today’s data came in a bit soft.

US producer prices were unexpectedly flat in November , compared to a consensus forecast of 0.2% growth. Core PPI, which excludes the volatile food and energy components, fell 0.2%; economists had expected an increase of 0.2%.

us jobless claims
US jobless claims unexpectedly jumped to a two-year high. | Source: Trading Economics 

US initial unemployment claims also spiked far higher than expected. Approximately 252,000 individuals filed for unemployment insurance , the highest reading since September 2017.

The employment period following the Thanksgiving holiday is notoriously volatile, but the rise in jobless claims still outpaced the economist estimate of 213,000 by a considerable margin.