Markets

Wall Street's Sudden Fear of Market Turmoil is Good News, Say Investment Analysts

For more crisp and insightful business and economic news, subscribe to The Daily Upside newsletter. It's completely free and we guarantee you'll learn something new every day.

Analysts at several of Wall Street's top banks are worried about the U.S. stock market — six major institutions sent out warnings last week that a storm is on the way.

But new research says Wall Street's fear is actually a good thing and that, while the banks freak out, investors can relax knowing history is on their side.

Relax

Last week, investor notes from Deutsche Bank, Goldman Sachs, Morgan Stanley, Citigroup and Bank of America expressed concerns over company valuations at unprecedented extremes, a seven month long stock rally, softening economic data, and the Federal Reserve's plan to taper stimulus. Taken together, it all looks like a game of Jenga that's about to be over.

But analysts at Sundial Capital Research crunched the numbers on how the market has performed when fear on Wall Street peaked alongside stock values. There's surprisingly good news:

  • Sundial went back and looked at times the S&P 500 came within 1% of a record at the same time that the Cboe Volatility Index — a widely used measure of Wall Street's expectations for volatility nicknamed the "fear gauge" — hit the upper 75% of its range. Last week marked the ninth time it's happened since 1995.
  • The previous eight times, the S&P 500 struggled for about one to four weeks. But every single time it rallied within two months. Not once did major losses impact equities in the long term.

"In my 40 years on the Street, we have never seen six Tier 1 banks collectively call for a large decline when the market was within 1% of its all-time highs," wrote Bensignor Investment CEO Rick Bensignor, in a note Monday. "It's usually quite the opposite. So, I don't think this leads to a 500-plus point decline in the SPX. 5% — sure; anytime. But 15%: I think it's highly unlikely."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More