Markets Trade in Volatility for Complacency

Over the past six or seven years, we have grown accustomed to high levels of market volatility – strong, quick moves in both directions have been the norm. However, the script has been flipped in recent months and market complacency has become the name of the game.

And this trend is not just limited to stocks – bonds, currencies, and managed futures have all seen volatility drop to extremely low levels. What this means is that market participants have very little concern for losses. Perhaps complacency is stemming from the fact the stock market has not had a 10% correction since 2011. Geopolitical issues have also quieted somewhat from earlier in the year, and the Federal Reserve has given no signs of raising interest rates anytime soon.  

Keep in mind that when everyone is on one side of the fence, the market tends to go the other way. Coming into 2014, market pundits were adamant that 2014 would be a poor year for the bond market, yet bonds have been one of the best performing asset classes this year.  

Source: Goldman Sachs

This Goldman Sachs chart illustrates just how low volatility has fallen with stocks, bonds and currencies.  The bottom line is that there is nothing happening right now to excite or fear investors. Economic data has been mixed, the economy is slowly plodding along and after last year's stock rally the markets are unsure where the next major move will be.  

I am very interested in how this plays out.