Investors are too complacent as the stock market deals with growing uncertainties like inflation and a potential recession, DataTrek says

• Stock market investors are too complacent amid growing concerns of a recession, according to DataTrek.
• The firm analyzed different VIX indices and found that all of them are below a 1-standard deviation reading.
• "US equities do not reflect sufficient 'fear' given current macro and micro uncertainties," DataTrek said.

Stock market investors are acting too complacent amid growing economic uncertainties, DataTrek Research co-founder Nicholas Colas told clients on Tuesday.

Given elevated inflation levels, concerns of an economic recession, and a tightening Federal Reserve, you'd expect there to be more fear in the stock market, he said, pointing to slightly above average readings in Wall Street's fear gauge, the VIX.

"The current macro backdrop is certainty more uncertain than the average of the last 10 years. No one, including policymakers, knows how long high inflation will persist or exactly what level of interest rates will be required to bring it back down to the Fed's long run target of 2%," Colas said.

"We also do not know how long any Fed policy-induced recession will last or how deep it will be," he added.

And yet, VIX indices for the S&P 500, the Nasdaq 100, and the Russell 2000 are all trading slightly above their long-run averages, and well below a 1-standard deviation reading, according to the note.

But Colas said that given the uncertain economic environment and a tightening Fed, US equity volatility could trade as high as 2-standard deviations from its long-term average.

A 2-standard deviation move would put the CBOE VIX Index at 36, which "is reserved for periods of genuine market panic about either Fed policy or its effect on interest rates and therefore the 'real economy' and corporate earnings," he said.

The last time the VIX traded above 36 was on March 7, just two weeks after Russia invaded Ukraine and oil prices shot higher. Today, the VIX currently sits at the 26 level, above its long-run average of 20.

That's too low, according to Colas, who noted that even Fed Chair Jerome Powell's hawkish speech at Jackson Hole last week was unable to lift the VIX to a 1-standard deviation level of 28.

"Perhaps we are being too cautious, but with 2-year Treasury yields very near their June 14th highs we think the VIX should be at last 1-standard deviation above the mean, if not somewhat higher," Colas said.

And while he remains positive on US stocks in the long-term, current readings in the VIX suggest that now is not an attractive entry point into the market.

"In our view, US equities do not reflect sufficient 'fear' given current macro and micro uncertainties. This is true for large caps, small caps, and big tech... maximizing returns in a tough tape means carefully choosing where to add equity exposure. Three different versions of the VIX all point to the same conclusion: let's be careful here," Colas concluded.