What Happened to the Wall of Worry?

Scott Eells | Bloomberg | Getty Images

What happened to the wall of worry? Barclays and a number of other shops are pondering exactly that question this morning. Consider:

1) The Volatility Index is near new lows, as are other indicators of volatility;

2) U.S. markets are up big: the S&P 500 at five-year highs; Russell 2000 and S&P MidCap Index at HISTORIC HIGHS;

3) China is showing signs of recovery, and Hong Kong stocks are at new highs;

4) Japanese stocks at two-year highs as Shinzo Abe's new government approved a $117 billion spending program ... and that's just the beginning. The Bank of Japan, which will meet Jan. 21-22, will likely adopt a higher inflation target of 2 percent, which will be accomplished by printing yen. The yen is at a 2.5-year low; and

5) the euro rallying big as European Central Bank head Mario Draghi signals he will continue as a dove.

The downside to all this: If markets are up big and volatility is down big, how much more room is there for markets to expand? If the perception is that risk is low in stocks, doesn't that imply that returns — at least in the short and near-term — are limited?

And whatever happened to the ancient market wisdom that when the VIX reached extremes of highs or lows — as it did in 2007, when it was very low, or late 2008, when it was very high — that it often predated a change in market direction? No one even brings that up any more.

There have been innumerable attempts to explain away the market's complacency. Barclays noted that "volatility can remain depressed for a very long time before it normalizes." That's true.

But the fact is that we have the ultimate Market Tranquilizers: central bankers of the world. The Federal Reserve's Ben Bernanke, the European Central Bank's Mario Draghi, the Bank of England, and the Bank of Japan have all done their best to calm things down ... and they have succeeded.

But to return to my point: If volatility remains low, we are going to be forced further out on the risk curve.

Already, returns on high yield funds are in the 5 percent range. In the U.S., growth stocks stocks outperformed value stocks for most of last year.

Buy, hold, or sell at those levels? My gut says to hold.

Elsewhere:

1) Are my eyes deceiving me? Inflows into stock mutual funds? Yes. Lipper is reporting that for the week ending Jan. 9, equity funds had inflows of $18.3 billion, the fourth largest inflows ever. However, this includes exchange-trade funds flows, which have been positive all last year. What's important is that inflows in equity mutual funds was also positive: $3.95 billion for domestic funds and $3.6 billion for non-domestic. This is a drop in the bucket compared to the roughly $6 trillion that sits in U.S. stock mutual funds, but after nearly four years of outflows from stock mutual funds at least it is a start.

2) China reported higher-than-expected inflation numbers; the Shanghai Index down 1.8 percent, worst day since Sept. 20.

3) The euro moved up again this morning, after a huge up move yesterday, on a call from Goldman Sachs to buy the euro.

4) A mixed week for global markets:

This Week:

Spain 2.5%
Japan 1.1%
S&P 500 0.4%
Hong Kong -0.3%
Germany -0.8%
China -1.5%
Brazil -1.8%