By James Saft
(Reuters) – For an uncertain world – one with fiscal cliffs, eurozone recession and regime change at the Federal Reserve – it sure is quiet out there.
Volatility in financial markets is now trading more like we are in the pre-crisis world of 2006, rather than one in which most of the crucial questions are left unanswered.
Sometimes called the fear index, the VIX which gauges investor perceptions of how jumpy the S&P500 stock index will be in the coming month, is now trading at around 16, more than 60 percent below its 2011 peak and not too far above its median level for the past century. In fact, if we get through December without a major market upset, 2012 will be the first year in seven without a significant spike in the VIX.
In theory this should be very good for riskier assets, as volatility has a nasty habit of flushing out investors. But in practice the outlook for 2013 may hinge on whether the forces suppressing volatility can keep the market placid.
To figure out the likelihood of that, you have to answer a question: is the low volatility a return to normal, perhaps supported by changes in the structure of markets, or are markets being tranquilized by “quantitative easing” by central banks and low interest rates?