What's going on?
Stocks in the US and Britain hit new record highs again on Monday (tweet this), but the real story might be that their prices have been extremely stable on a day-to-day basis – “volatility” is near its lowest level in decades!
What does this mean?
The more volatile a market is, the more sharply it moves up and/or down over a given period of time. Over the past few months, the volatility of stocks in the US has been at its lowest level in more than twenty years (and similarly subdued in Europe). At the same time, stocks are hitting new all-time highs (in most major markets, including the US, UK and Germany). So, it’s a calm climb higher into record territory.
Why should I care?
For markets: US stocks are at an important level.
Overall, US stocks are at almost the exact same level they were on March 1st. Stocks have struggled to break through that level convincingly. For many stock traders, this kind of technical market behavior is important: stocks should either “break out” higher from here or fall back (it’s kind of like amateur cliff jumping: either the person is going to go for it, or they are going to chicken out – but they’re unlikely to stand on that ledge for a long time!).
The bigger picture: Low volatility tends to increase risks.
Low volatility encourages investors to be confident that stocks are a safe and rewarding place to put their money, which encourages more people to buy stocks. But that means there are more people prepared to sell when new risks emerge, which tends to exacerbate the selloff whenever it finally comes.