Is the lack of fear on Wall Street something to fear?
Sunni extremists are inching closer to Baghdad. A housing bubble in China is deflating. Russia is massing troops near the Ukrainian border again. Military forces in Egypt and Thailand have staged coups.
In a world suddenly more dangerous, you’d think fund managers and traders would be selling and buying and selling again in a frenzy of second-guessing. Instead, they’re the picture of calm and contentment.
People are trading 38 percent less each day than they did four years ago. Prices of bonds and stocks are barely moving day by day. For 50 days in a row the Standard and Poor’s 500 index has risen or fallen by less than 1 percent, a state of serenity unmatched since 1995. Then, last Wednesday, Federal Reserve Chair Janet Yellen told investors the U.S. economic recovery was on track, and things got really dull. A gauge of expected swings in stock prices, known as the “fear index” among traders, sunk to lows not seen since 2007, when stocks began a 21/2 year plunge.
Which helps explain why the calm may not last: The lack of fear is spooking some people.
“It’s quiet out there,” says Robert Buckland, chief global stock strategist at Citigroup. “Eerily quiet.”
As with weather, the theory goes, so with markets: Calm often precedes storms. Investors get cocky, take on too much risk, and prices of stocks and bonds collapse.
Most professional investors, strategists and economists don’t appear worried that the lack of worry is leading to reckless bets, not yet anyway. Yellen, for one, says there’s little evidence of trouble brewing. But a few dissenting voices see trouble aplenty.
Investors are borrowing money more than ever to buy stocks. Sales of “junk” bonds from the riskiest companies are at a record. Some investors are so heedless now that they’re willing to accept rock-bottom interest payments to lend to risky countries.
Spain, struggling to collect taxes from a population facing 26 percent unemployment, is paying just 1.3 percent to borrow money for five years, less than the U.S. pays.
Says Michael Lewitt, founder of the Credit Strategist Group, an investment manager: “No one is afraid of anything.”
The list of things to shrug off over the past three years is lengthy: two dozen government collapses, surprise military moves and mass demonstrations.
Why so little reaction from investors?
David Levy, chairman of the Jerome Levy Forecasting Center, blames “fear fatigue.” Investors have faced down lots of trouble over the years, from a European debt crisis to a pair of near defaults by the U.S. government. None of these things have kept stocks down for long.
“It’s hard to be scared all the time,” Levy says. But, he adds, “The more sectarian violence, the more countries fighting civil wars, the greater the potential for something going wrong.”
Another reason for calm is central banks. From Tokyo to Washington and London, they’ve kept short-term borrowing rates they control low and bought trillions of dollars worth of bonds to push down long-term rates, too. Many investors are convinced little can upset markets as long as central banks are willing to pump money into the financial system.
The problem is, panic can spread fast at times when there is little trading. A few big sales can push prices down dramatically. That is what happened last summer, when owners of municipal bonds found few buyers during a bout of selling. Panic mounted and prices plunged.