Pro Analysis

Santoli: Market making volatility calls look silly

A trader on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
A trader on the floor of the New York Stock Exchange.

Horror movies and approaching storms have trained us to fear a quiet stillness. So it's little wonder the unusually calm stock market of recent weeks is seen by many investors as more eerie than soothing.

This unease with a steady tape with indexes at record highs is even tougher to take because bulls and bears alike came into this year and out of the wintertime panic insisting that jarring volatility would likely persist. Google "market volatility is here to stay" and the page fills with this assertion repeated by the likes of Jamie Dimon, Vanguard Group, Russell Investments and Wells Fargo investor survey respondents.

Not so much. On 19 of the past 21 trading days, the S&P 500 has moved less than 0.5 percent, a record of static action not seen since September 1995.

The market lull is not just about late-summer doldrums. In fact, August – as widely noted two weeks ago – is among the weakest and most unsettled months of the year.

It seems the market panic following the Brexit vote in late June drove an outsized selling response that was quickly reversed - in large part because professional investors were already positioned defensively. The rebound coincided (by happenstance) with a marked firming in U.S. economic data and better-than-feared corporate earnings.

Meantime, global interest rates have stayed anchored by central-bank exertions abroad and a broadening sense that the bar for a Federal Reserve rate boost was set quite high. With yield-centric stocks now so important to the indexes, bond-market calm is also suppressing equity volatility. And the breakout by the S&P 500 to new highs after 14 months in the red got the trend-followers aboard.

The question now is whether this confluence of market-friendly forces has largely played out, or if we're in for a prolonged stretch of unhurried markets with an upside tilt.