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Some analysts worry about Wall Street's calm in turmoil

In a world suddenly more dangerous, you’d think fund managers and traders would be selling and buying and selling again in a frenzy of second-guessing. Instead, they’re the picture of calm and contentment.
By BERNARD CONDON, Associated Press Published: June 25, 2014
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Is the lack of fear on Wall Street something to fear?

Sunni extremists are inching closer to Baghdad. A housing bubble in China is deflating. Russia is massing troops near the Ukrainian border again. Military forces in Egypt and Thailand have staged coups.

In a world suddenly more dangerous, you’d think fund managers and traders would be selling and buying and selling again in a frenzy of second-guessing. Instead, they’re the picture of calm and contentment.

People are trading 38 percent less each day than they did four years ago. Prices of bonds and stocks are barely moving day by day. For 46 days in a row the Standard and Poor’s 500 index has risen or fallen by less than 1 percent, a state of serenity unmatched since 1995. Then, last Wednesday, Federal Reserve Chair Janet Yellen told investors the U.S. economic recovery was on track, and things got really dull. A gauge of expected swings in stock prices, known as the “fear index” among traders, sunk to lows not seen since 2007, when stocks began a 2 1/2 year plunge.

Which helps explain why the calm may not last: The lack of fear is spooking some people.

“It’s quiet out there,” says Robert Buckland, chief global stock strategist at Citigroup. “Eerily quiet.”

As with weather, the theory goes, so with markets: Calm often precedes storms. Investors get cocky, take on too much risk, and prices of stocks and bonds collapse.

Most professional investors, strategists and economists don’t appear worried about reckless bets, not yet anyway. Yellen, for one, says there’s little evidence of trouble brewing. But a few dissenting voices see trouble aplenty.

Investors are borrowing money more than ever to buy stocks. Sales of “junk” bonds from the riskiest companies are at a record. Some investors are so heedless now that they’re willing to accept rock-bottom interest payments to lend to risky countries.

Spain, struggling to collect taxes from a population facing 26 percent unemployment, is paying just 1.3 percent to borrow money for five years, less than the U.S. pays.

Says Michael Lewitt, founder of the Credit Strategist Group, an investment manager: “No one is afraid of anything.”

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Given all the armed uprisings, coups and mass protests around the world these days, you’d think investors would be panicking. But most appear untroubled, content with their holdings and loath to make any big moves. Some experts warn that, as with the weather, calm often precedes a storm.

Among the signs of tranquility:

— LITTLE TRADING: So far this year, investors have traded an average 3.4 billion shares each day on the New York Stock Exchange, 38 percent less than they did in the same period four years ago.

— SMALL PRICE MOVES: The Standard and Poor’s 500 index has risen or fallen less than 1 percent for 46 days in a row, a rare state of stasis. Stocks haven’t moved so little for so long since 1995, says Howard Silverblatt, senior index analyst for S&P Indices.

— CALM AHEAD, MAYBE: Meanwhile, the so-called Vix index, which tracks expected price swings in the S&P 500, suggests things could remain sleepy for a while yet. That measure, dubbed the “fear index” by traders, has been hovering around 11 recently, about half its 10-year average. Last week, it dropped to 10.6, the lowest since 2007, when stocks began a 2 1/2 -year drop that erased half of their value.

— NO CORRECTION: Professional stock investors say it’s healthy for a bull market to occasionally have a “correction,” or a drop of 10 percent or so. The S&P 500 hasn’t had one for nearly three years, twice as long as the average back to World War II.

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