Stocks were down on Friday, with the S&P 500 (^GSPC 0.02%) losing 0.1%, while the narrower, price-weighted Dow Jones Industrial Average (^DJI -0.11%) gained less than 0.1%. However, the S&P 500 gained 0.1%, for its seventh consecutive weekly gain. The last seven-week streak occurred a little over two years ago, between December 2010 and January 2011.
Reflecting the positive result for the week, the VIX Index (^VIX 1.78%), Wall Street's fear gauge, fell 1.6%, to close at 12.46 -- its lowest closing value since Jan. 31. (The VIX is calculated from S&P 500 option prices, and reflects investor expectations for stock market volatility over the coming 30 days.)
Life at zero-bound volatility
An evening more interesting stock market story than the seven-week streak is the languid death of volatility over the past five days. The decline in implied stock market volatility, as reflected in the VIX Index, has been well documented in my column -- the index is now plumbing levels which, prior to this year, it had not seen since April 2007.
Now, consider realized volatility -- the actual changes observed in the stock market. Over the past five days, the S&P 500 did not experience a move, up or down, with magnitude greater than 0.2%. In fact, trailing five-day volatility was just 1.7%. That's the lowest it has been since Oct. 1996, and well within the lowest half-percent of daily values going back to the start of 1950.
Granted, this was a week that was light in terms of the economic data and policy calendar. Light, perhaps, but not empty: A three-day gathering of G20 finance ministers and central bank governors began in Moscow yesterday – the lead-up to which has proven unusually volatile in foreign exchange markets. Investors also received word on Thursday that Europe's economies shrank faster in the fourth quarter than at any time since the bankruptcy of Lehman Brothers.
There was also a catalyst for upward momentum, as animal spirits appear to be picking up in corporate boardrooms. On Thursday, Berkshire Hathaway announced it is partnering with investment firm 3G Capital to acquire food group H.J. Heinz, the latest in a spate of potential multi-billion dollar deals. These animal spirits didn't spill over into the stock market; none of these events were able to inject some electricity into the index, which flatlined.
Was this simply an anomalous week, or does it mark a turning point at which investors must decide whether or not they have the conviction to drive the rally on? I don't know, but I find zero-bound volatility unsettling, and I can't help but wonder if it is a symptom of the Fed's extraordinary monetary experiment. Either way, it's an excellent reminder that one should remain laser-focused on valuations. When one is in uncharted waters, a margin of safety is no luxury -- it's vital.
