After 47 consecutive trading days of relative calm for U.S. stocks – the longest stretch of tranquillity since 1995 – market players are growing concerned that investors are tuning out the risks.
"Low volatility" and "investor complacency" are the new catch phrases of Wall Street as the S&P 500 index nears the mid-point of 2014 without a daily move in either direction of at least 1 per cent in more than two months.
"It's quiet out there," Robert Buckland, chief global stock strategist at Citigroup Inc., said Tuesday amid another relatively placid trading session.
This absence of fear reflects faith in the resilience of U.S. stocks, keeping benchmarks near record highs despite the prevalence of potentially destabilizing shocks.
Take the crisis emerging in Iraq. Should the situation deteriorate and lead to oil supply interruptions, a recession and bear market is conceivable, said Ed Yardeni, president and chief investment strategist at Yardeni Research.
"Investors have decided that's a great opportunity to buy more oil stocks rather than get out of the market," he said.
There are other potential negative catalysts, from high-flying Chinese housing prices to the tensions between Ukraine and Russia.
But stock investors have proven dismissive. Stock volatility is nearly imperceptible, both in terms of the S&P 500's tight trading range, and in the level of concern registered by the so-called "fear index."
The VIX measure of implied volatility fell to 10.4 on Friday, the lowest reading since 2007, before the financial crisis sent the index soaring above 80.
That level of confidence in U.S. stocks might be expected after the kind of year investors had in 2013, when the S&P 500 blew past forecasts and returned 30 per cent.
Now, as then, U.S. stocks are just about the only game in town. Bonds remain unattractive because of low yields and the prospect of capital losses once rates begin to rise.
Volatility and risk have consumed many of the emerging markets that served as havens of growth through the recession.
And while Canadian stocks have outperformed other Western stock markets so far this year, most of the credit is owed to energy stocks, said Brian Belski, chief investment strategist at BMO Nesbitt Burns. The S&P/TSX energy index is the top performer on the index this year with a 17.7-per-cent return.
"Is that because we're starting to see rapid acceleration of global growth? No. Is it because of geopolitical risk? Probably," Mr. Belski said.
Also a factor is a rotational trade back into a developed Canadian market that dramatically underperformed the S&P 500 last year, he said. "Everyone believes U.S. stocks are the place to be. We've been bullish for five years. Now, everybody is bullish."
Investors have identified a powerful champion in the U.S. Federal Reserve, which, through its bond-buying program, has instilled confidence among buyers pouring money into the stock market.
Last week, Fed chair Janet Yellen talked down a recent uptick in inflation, leaving investors reassured that rates would remain near-zero well into 2015.
"The source of the market's complacency is the relative certainty about what Fed policy is likely to do ahead of here," Mr. Yardeni said.
The lack of volatility itself is not necessarily a portent of doom. But there is a fine line between a market that is justifiably calm and a market that is dangerously complacent and willing to ignore emerging risks.
"Pullbacks occur when nobody thinks there's one coming," Mr. Belski said. "And no one is trading like they're looking for a pullback. The market is setting itself up for a big negative surprise that's going to shake people."