Stocks: Back to the "Old Normal?"
Jan 18th 2013 7:33PM
Updated Jan 18th 2013 10:45PM
Another solid day for stocks, as the Dow and the broader S&P 500 Index gained 0.4% and 0.3%, respectively. Both indexes closed at a five-year highs. Today marks the third consecutive week of stock market gains.
Volatility: An endangered species
Meanwhile, the VIX Index fell 8.2%, to close at 12.46. Prior to today, this is the lowest value the index has reached -- whether on a closing or intraday basis -- since the beginning of June 2007. Over the full closing price series since the inception of the index in January 1990, today's closing value is close to being in the bottom decile (i.e. the bottom 10% of values -- right now, it's in the bottom 12%). The VIX, which is derived from option prices on the S&P 500, is a measure of investors' expectations for stock market volatility over the next 30 days. (For some more thoughts on how to put current VIX values in context, you can refer to Stocks: 1 Number That Doesn't Add Up.)
The same is true of the VIX's European equivalent, the EURO STOXX 50 Volatility Index (known as the VSTOXX), which closed at 15.88 today - nearly 60% below its 52-week high. Prior to December, you need to go back to the beginning of June 2007 to find a lower closing price.
The phenomenon stretches across asset classes, too: This week, Goldman Sachs put out a note that contained a graph with the heading "Commodity volatility has dropped to mid-1990 levels" [sign-up required], measured by the observed one-month volatility of the S&P GSCI index.
Part of this phenomenon is undoubtedly attributable to clear signs of recovery in the U.S. housing market, the financial system, and the broad economy, but central bankers have played an instrumental role in suppressing asset price volatility in the U.S. and perhaps even more so in Europe.
Which raises the question: Are we back to the days of the "old normal," and the paradigm that monetary wizards can conquer all volatility and structural imbalances?
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The article Stocks: Back to the "Old Normal?" originally appeared on Fool.com.Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him @longrunreturns. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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