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A Theory Why Stock Market Volatility is Low

Last update on: Jun 22 2020

Many investors have noticed that market volatility has been very low in 2017, and they’re developing theories. Some point to history and say low volatility indicates a major move is about to happen, and that is usually is a negative move. But there are other theories. This theory says that investors live and learn, and maybe more investors have learned to ignore the headlines and market noise. Maybe they’re doing what we do at Retirement Watch, focus on the things that really matter to the markets.

But if the last few years have taught investors anything, it is that those with a hair-trigger reaction to political news stand to lose, while those who bet on a continued steady and unexceptional expansion will win.

You see a bit of that in how subsequent conflicts over United States fiscal policy during the Obama years generated less market volatility. The debt ceiling standoff of 2011 generated huge market swings as traders bet on the risk of a default; the standoffs over the “fiscal cliff” at the end of 2012 and a government shutdown in October 2013 caused mere murmurs.

Investors learned a lesson that it’s easy to overreact to political developments, and the same seems to have happened globally in the last several months.

 

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