NEW YORK - The stock market isn't nearly as scary a place today as it was in 2008 when investors were subject to daily roller-coaster-type price swings that resulted in acute bouts of money-related anxiety.
In the past 14 months the stock market has been eerily quiet. Aside from its steady and highly publicized rise to five-year highs, the market has been downright boring.
Indeed, the Dow Jones industrial average's frightening and violent mood swings have leveled off dramatically. Its manic-depressive behavior is M.I.A. Those big intra-day market moves that cause fear levels to surge and make Page One news - such as the 500-plus-point plunge in September 2008 when Wall Street titan Lehman Bros. filed for bankruptcy or the nearly 1,000-point swing in a matter of minutes during the May 2010 flash crash - have been few and far between.
It's as if the Dow is under the influence of mood-altering drugs that smooth out the peaks and valleys and foster a more investor-friendly steady-Eddie-type trading pattern. The sleepy calm, ironically, comes amid a period when the Dow is also behaving as if it is on performance-enhancing drugs as it climbs within about 200 points of its October 2007 all-time high of 14,164.53.
"Last year was the quietest year since 2006," says Fane Lozman, chairman of Scanshift.com.
How quiet? In 2012 the Dow posted intra-day swings of 200 points or more on just 29 trading days. That was the fewest since 2006. And far below the hair-raising year of 2008 when the Dow gyrated up and down 200-plus points during a record 173 trading sessions.
The so-called quiet period was due mainly to a sharp reduction in the "fear factor," as worries of a double-dip recession in the U.S. and a Greek financial meltdown receded, Lozman says.
The market calm has continued in 2013, with only one session suffering a 200-point swing.
The cause of the market calm and what it means for markets is a hot topic of debate on Wall Street.
Bob Doll, chief equity strategist at Nuveen Asset Management, argues that the elevated levels of market volatility during the 2007-2011 period was "abnormal," while the market's recent Zen-like calmness is more akin to historical volatility levels.
And while he notes that a 200-point swing means different things when the Dow is trading at 14,000 vs., say, 7000 or 10,000, he argues that less-violent price action is generally a good thing and a reflection of a "world that is slowly healing." The market calm, Doll adds, is due in part to the fact that the big systemwide threats to financial markets that popped up at the peak of the credit crisis a few years ago "are in the process of fading." Indeed, as the odds of so-called tail risks, or worst-case scenarios, diminished, so did the market's volatility.
But Doll is not sure volatility will remain this low forever, although he doesn't envision the type of extreme market swings such as we saw before, during and after the 2008 financial crisis.
"That does not mean some short-term complacency hasn't crept into the market," Doll adds. "It probably has."
David Kotok, chairman and chief investment officer at Cumberland Advisors, blames the low volatility and rising stock price pattern on the Federal Reserve's zero-interest-rate policy. The certainty of low rates around the globe has given investors the green light to take risk, which has enabled stock markets around the globe to rise in a correlated and synchronized way, he says.
Market calm is also evident in a closely followed Wall Street "fear gauge," called the VIX. The VIX is trading around 13, its lowest level since April 2007, according to Scott Wren, senior portfolio strategist at Wells Fargo Advisors. The VIX peaked around 80 at the height of the financial crisis in October 2008. It tends to move lower during rallies and steady uptrends and rise during market pullbacks.
"Based on current VIX levels," Wren wrote in a market commentary titled "What happened to the volatility?": "The weather forecast for the stock market seems to be 'clear and calm' over the next few weeks or even months." But Wren says the fight looming in Washington over $1.2 trillion in automatic spending cuts via sequester set to kick in March 1 could ratchet up volatility.
While Lozman says market volatility is currently near its lowest level since wild swings picked up steam in 2000, he warns that the sleepy market could be a sign of the calm before the storm.
He says that during stable periods the market acts like a spring that gets increasingly compressed. He warns that when it finally decompresses due to a major news event, it can inject volatility back into the market "in a flash."
"History shows periods of low volatility are not going to last, so be wary," says Lozman.
When volatility is low, that is the time for savvy investors to purchase inexpensive portfolio protection via options to hedge their downside risk, adds Jack Ablin, chief investment officer at BMO Private Bank. Investors who think the Federal Reserve will forever be able to protect them from losses, he adds, will likely learn the hard way that they're wrong.
"That assumption," says Ablin, "could eventually come back to haunt them."