Slate – This season’s stock-market mystery is: The Case of the Declining Volatility. Volatilityâ€â€the degree to which stocks move in any particular directionâ€â€is strangely absent on Wall Street. The DowJones Industrial Average closed the year down 0.61 percent, the smallest annual movement since 1926, and just one of four years in which it moved less than 1 percent in any direction on the year.
On a day-to-day basis, the markets are also less volatile. In his year-end column, Floyd Norris of the New York Times wrote that “from 2000 to 2002, the Standard & Poor’s 500 showed a daily gain or loss of at least 1 percent for two days a week or more.” But, he noted, volatility has fallen sharply since then. In 2002, the S&P 500 moved 2 percent or more in a single day 52 times. That didn’t happen once in either 2004 or 2005. According to the VIX Index, which is traded on the Chicago Board Options Exchange and is regarded by professionals as the single best gauge of investor sentiment on market volatility, the price of insuring against volatility has been declining for several years. Meanwhile, hedge funds, which thrive on volatility, had a lame year in 2005 precisely because of the decline in the number of manic episodes.
What’s this all about? After all, the world is arguably more volatile than ever. There’s instability in Iraq and Venezuela, famine in Africa, and tensions in the former Soviet bloc. With periodic corporate implosions like Refco and slow-motion disasters like Delphi, the process of creative destruction is proceeding apace.
