Wall Street needs to stop freaking out about low volatility, Merrill says

Key Points
  • Concerns about complacency in the market have been brewing all year, with the CBOE Volatility Index (VIX) hovering near levels not seen since 2007.
  • But Bank of America Merrill Lynch's Stephen Suttmeier has a message for investors: Relax.
The volatility roadmap: What happens when the Vix falls below 10

The CBOE Volatility index (VIX), Wall Street's preferred measure of stock-market fear, hit its lowest level in 10 years on Monday, unnerving traders who believe investors have grown too carefree about this bull market.

But Bank of America Merrill Lynch had a message for investors concerned about how calm things are: Just relax. The bank noted that big bull markets can experience very long periods of low volatility.

"The current secular bull market has low volatility and a low but perhaps rising US 10-year yield. This supports our view that the current secular bull market is similar to the 1950s secular bull
trend," Stephen Suttmeier, the firm's technical research analyst, said in a Monday note to clients.

The analyst used the 65-day moving average of the absolute value of S&P 500 price returns — a specific measure of S&P 500 return and volatility — and found the market trend since April 2013 is the lowest since the period between 1950 and 1966.

"This suggests volatility can stay low and the secular bull market should continue," he said.

The benchmark 10-year yield traded about 10 basis point below where it started the year, but has spiked nearly 20 basis points since hitting its 2017 low last month.

US 10-year yield in 2017

Source: FactSet

Concerns about the lack of volatility in the market have been brewing all year, with the VIX hovering near levels not seen since 2007. The VIX hit a low of 9.72 on Monday, its lowest level since February 2007.

The index has closed below 10 just nine times since 1990, but each of those times was followed by negative 12-month returns on the S&P 500 index.

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Trading Nation: Volatility to return?