Stock-market volatility isn’t what it used to be. Just a few weeks have passed since the Dow Jones Industrial Average took a 416-point plunge on 27 February, for its sharpest one-day drop in four years.
Yet approaching the end of the first quarter of 2007, US stock-market indicators stand within a percentage point or two of where they began the year.
It used to be that after a bombshell day like 27 February, you would feel the fallout for months. Dangerous as it may be to say, something must be different this time.
Two broad explanations present themselves. The first is that the economy itself is healthier and more stable than most modern investors are accustomed to, with strong worldwide growth and relatively benign conditions in inflation and interest rates. The second is that the markets themselves have grown more efficient in the hands of the biggest and best-informed population of investors the world has ever seen.
Everybody frets as much as ever about inflation and recession—and both perils constantly warrant investors’ respect. Even so, the inflation we are concerned about in the US is running at 2.4%, as measured by the latest monthly year-over-year change in consumer prices. That’s less than a percentage point above where the Federal Reserve would like it to be—and scarcely more than half the 4.1% average rate over the past 50 years.
Recession? We’ve had but one of those in the past 15 years, and even that one didn’t last long. While US growth may dip this year to 2% or even below, the pace is far stronger in many other parts of the world.
The markets themselves, meanwhile, have travelled a learning curve.
The appeal of these two explanations, economic and financial, for reduced volatility is only enhanced by the neat way they fit together, which may help explain why so many people in the markets were happy to see the return of volatility on 27 February, scary though the day’s experience may have been.
Trouble is, those same people went and spoiled the game by immediately starting to smooth things out again.