I must be feeling great. The financial news tells me that repeatedly. Seemingly every story tells me that this is either the best month ever, or the best November ever, or something extraordinary about the month that is about to draw to a close. The highlights include:

• The S&P 500 Index (SPX) is having its second-best month since 1991, surpassed only by April of this year. It would be its best November ever.
• Energy stocks in SPX are up over 30% (though down for the year)
• Europe’s Stoxx 600 is up over 15% this month, pushed by markets in France (+21%), Italy (+26%), and the UK (+14.7%) which are all on pace for their best months ever
• Japan (+15%) finished its best month since 1994
• Global stock markets added $6.7 trillion to the value of world equities

There are more, but I think you get the point. The world is awash in money and positive sentiment, and they are combining to push asset prices higher around the globe.

How does this enthusiasm jibe with the increasing numbers of vacant storefronts in communities I frequent, the long lines at food pantries, or the growing Covid fears among people I know? The stock market doesn’t care about me or the problems of individuals or small businesses. Stock markets are comprised of large businesses, and most indices are weighted by market capitalization. That means that investors – especially those who follow major indices — are forced to care most about big businesses. 

That said, smaller stock indices have done quite well too. The Russell 2000 Index (RTY) is another index having its best month ever. While the total market capitalization of that index is just a bit larger than that of Apple (AAPL), it is a notable market benchmark nonetheless. Yet even those stocks are too large to be considered small businesses. Small businesses matter in the aggregate, especially to the banks that finance them, but they simply don’t register to the stock markets. This is why we often hear the refrain that the stock market is at best an imperfect measure of the economy.

To what do we owe all this enthusiasm? Investors have been rightfully encouraged by the prospect of a return to normalcy after the newly developed vaccines will be distributed. Markets routinely discount events about 6-12 months away, which is roughly the time frame during which we can expect widespread availability of the vaccines. This enthusiasm seems well earned. Yet markets are also assuming that money will remain cheap and plentiful. The Federal Reserve and other central banks have pledged to keep money flowing until they see visible signs of inflation. Markets have a lot riding on the idea that the economy will bounce back without causing enough inflation to threaten central bank liquidity.

Sentiment indicators are also at or near recent or all-time highs. That is often a contrarian worry. When people express their bullishness, it means they are largely invested already. We have seen an ability for markets to continue to build upon already stellar gains. Can this continue? Investors think it can. 

There is one major exception to the record sentiment. The CBOE Volatility Index (VIX) is stubbornly in the ’20s, though it is well below recent peaks. The last time we saw similar consensus in sentiment measures was in January 2018, just after the recent tax cuts were signed into law. At that time, VIX was around 12, and I had several arguments with smart people who tried to convince me that it was a good short at those levels. I asserted that it was a one-tailed trade, with potential profits of 1-2 points and a potential loss of 10 or more. In February of that year, we had a so-called “volmageddon”, putting the “or more” in my “10 or more” into play as markets had a brief, scary plunge. At that time the “fear gauge” showed almost none. Now it is above longer-term averages.

Yet there is a major difference in the market dynamic that is currently affecting VIX. Another record that was shattered this month was the total volume in call options as individual investors adopted them in unprecedented numbers. All those call options had to be sold be someone, usually market makers. High demand for options – puts or calls – raises their prices as sellers are forced to pay up to hedge the calls that they have sold. Those rising prices are reflected in higher implied volatility measures across the board, including VIX. VIX is not now, nor has it ever been, a fear gauge. It is the market’s best estimate of volatility over the next 30 days. And volatility counts to the upside too!

Does it matter that I haven’t ventured beyond 50 miles of my home, that I haven’t seen most of my friends or family in months, or that I’m terrified about what could happen to them or the communities which we inhabit? My investments are doing well. In some cases, doing so at a record clip. If the markets tell me that I’m having my best month ever, it must be the case.