Stock market volatility is unusually low these days. Does that mean investors are complacent? We don’t think so. In fact, some risk indicators suggest market participants may be less relaxed than they seem.

There are plenty of things to worry about today, including stretched asset valuations, rising interest rates and political uncertainty. But investors don’t seem to be sweating any of them.

Actual US equity volatility is extremely low, judging from three-month rolling returns that measure how volatile S&P 500 stocks are. In fact, there have been just nine other three-month periods over the past quarter-century when actual volatility was lower than it is now.

Investors don’t seem to be expecting much volatility ahead in US stocks, either. The VIX, an index that captures the expected volatility priced into S&P 500 options, is also near all-time lows. Global stock market volatility—both actual and expected—has fallen too, though not as much.

A CHANGING MARKET REALITY

What gives? Are market participants denying reality?

The short answer is no. We’re actually seeing a changing reality for markets. Global economic conditions and policies are changing—and so are the issues investors focus on. US equities are a case in point.

For years after the global financial crisis, equity investors fixated on a few big macroeconomic and geopolitical issues. Would central banks keep loosening monetary policy to fight off deflation? Would they unwittingly stoke higher prices instead? Would the euro survive? The prevailing answer on a given day determined whether investors bought or sold, causing most S&P 500 stocks to rise or fall together.

Things are different now. The world economy is in better shape, the euro appears to be sticking around and markets are moving away from relying solely on central bank policy. Individual investors have shifted their focus to individual company fundamentals and stock-specific drivers. The result: lower correlation among individual stocks, and less volatility.

WHEN VOLATILITY SPIKES

Despite the stronger focus on fundamentals, the market isn’t asleep at the switch when it comes to potential roadblocks.

When investors have sensed danger, they’ve reacted swiftly. The VIX spiked before the first round of France’s presidential election. But when pro–European Union candidate Emmanuel Macron won the presidency in the second round, calm was restored (Display).