Volatility falls most since depression as stock funds gain

Funds Pulled

Investors who pulled almost $300 billion out of stock funds since the market bottomed pumped $37 billion into equity funds in January, the most since 2004, estimates from the Washington- based Investment Company Institute show. Technology companies and financial institutions received the biggest inflows, according to data from Birinyi Associates Inc., the Westport, Connecticut-based investment adviser.

Smaller price fluctuations may be a sign that investors are becoming too complacent, according to USAA Investments.

The Federal Reserve has left its target interest rate for overnight loans between banks near zero since 2008 and promised not to increase it as long as the unemployment rate stays above 6.5%, forcing investors to search for higher returns in risker securities. Money-market funds yielded an average of 0.04% as of Feb. 14, according to Crane Data, while the S&P 500 has climbed 13% over the past 12 months.

Stock Run

“What we’re concerned about now is it may have run too far too fast,” John Toohey, vice president of equity investments at USAA, which manages more than $54 billion, said in a Feb. 12 phone interview from San Antonio, Texas. “Economic growth isn’t that strong at the moment. Any sort of crisis, we’re worried that volatility will spike up, and with equity markets recently being so strong, it’s likely to lead to a correction.”

Investors are piling into stocks because the Fed’s bond purchases have depressed interest rates on Treasuries and created an artificial environment, according to Nassim Nicholas Taleb, professor at New York University and author of “The Black Swan” and “Antifragile: Things That Gain From Disorder.”

“I am forced to buy stocks myself because I’m afraid of bonds,” Taleb said in an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Sara Eisen. “We have never lived in a world as artificial as today, as far away from the organic nature of how things should be. Any environment that cannot convert crisis to fuel is doomed.”

Profits Shrink

U.S. gross domestic product unexpectedly contracted in the fourth quarter and is forecast to expand 1.9% this year, according to the median of 94 economist estimates compiled by Bloomberg. The unemployment rate is at 7.9%, compared with the 5.8% average since 1948. Corporate profits may drop 1.5% this quarter, analyst estimates compiled by Bloomberg show.

Lower-than-average volatility preceded the last bear market, when daily swings fell to an average 0.54% during the two years before the S&P 500 peaked. The index tumbled 38% in 2008, the biggest drop since 1937.

Volatility at today’s levels has never led to losses on the S&P 500. In the nine instances that the index gained or fell 0.43% or less, the S&P 500 ended the year higher.

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