Low volatility may not necessarily mean investor complacency, Schwab strategist says

  • The CBOE Volatility Index (VIX), which gauges fear in the market, traded below 10 on Tuesday, near levels not seen in over 10 years.
  • Liz Ann Sonders of Schwab believes there are more nuanced reasons than complacency for the suppressed volatility.
  • Volatility may spike once the Fed starts to shrink its balance sheet, she said.

Volatility may have dropped to 10-year lows but it doesn't necessarily mean there is complacency in the market, strategist Liz Ann Sonders told CNBC on Tuesday.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, on Tuesday traded below 10, near levels not seen since December 2006. That has some traders concerned about investors growing too carefree about the bull market.

However, the VIX is "more of a coincident indicator than it is it is a forward-looking indicator of some sort of impending doom for the market," the chief investment strategist at Charles Schwab said in an interview with "Power Lunch."

She believes there are more nuanced reasons than complacency for the suppressed volatility, like the rise of exchange-traded funds and investors finding other ways to hedge besides S&P 500 index options.

Michael Nagle | Bloomberg | Getty Images

Meanwhile, the market has done fairly well and remains in a calm range because the news has been pretty good, Sonders explained.

"We have not had any significant sort of shocks to the system. I think the market has appropriately digested the fact that we are now in a rate-hiking cycle," she said.

Plus, earnings season has been "quite strong," with 14 percent earnings growth and 75 percent of companies beating expectations in the first quarter, she added.

Volatility will return, she said, and it may come when the Federal Reserve starts to shrink its $4.5 trillion balance sheet. Many believe that could occur at the end of the year.

In the meantime, timing those spikes "is a fool's errand," Sonders said.

"It's actually easier if you're going to sort of play moves in the VIX to wait until you see the spike because high levels of the VIX don't tend to persist. Low levels of the VIX can persist for an extended period of time."

— CNBC's Fred Imbert contributed to this report.