Where’d all the volatility go?

Bob Moon Feb 7, 2012

If you had to pick one word to describe the financial markets in 2011, you would have been smart to go with “Volatile” (with a capital “V” for emphasis). Between Aug. 5-30, 2011, the S&P 500 closed up or down more than 2.5 percent every day.

But in the 25 trading days so far in 2012, just three have seen the S&P gain or lose more than 1 percent.

So, what happened?

Erik Ristuben, chief investment strategist at Russell Investments, says we can boil the lack of volatility down to one word as well: “Europe.”

Ristuben says European governments are still figuring out how to deal with debt-laden countries (looking at you, Greece, Portugal, Ireland, Spain, Italy), though they’ve made huge strides in tackling the liquidity problems that plagued European banks last year and roiled the markets.

The European Central Bank’s long term refinancing operation (LTRO) allows banks to borrow directly from the eurozone’s “lender of last resort,” and Ristuben says “that’s been the single biggest factor in reducing volatility.”

Still, as Greek negotiators keep failing to meet their deadlines, we may not be out of the woods yet.

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