ROI-Markets face down 2025's upheavals with puzzling ease: Mike Dolan

By Mike Dolan

LONDON, Nov 13 (Reuters) - A turbulent 2025 has been remarkable as much for what didn't break as for what did. Financial markets and the wider global economy are looking to end the year in a fairly serene state despite Washington's bid to rewrite the global economic rulebook.

The market suffered a relatively brief heart attack following President Donald Trump's chaotic April tariff jolt, but that healed pretty quickly. The major stock indices are set for healthy full-year gains, with annualized second-half growth rates for the U.S. and global economies eclipsing 3%. And to top it off, bond market borrowing rates have stabilized.

Yet businesses, banks, economists and fund managers have talked of little else all year except uncertainty and upheaval.

The disconnect is stark.

Politics may explain some of that, but one other obvious explanation stands out.

The ongoing artificial intelligence investment boom is both disruptive and uncertain as well as flattering to top-line growth and megacap stock valuations.

But with bubble talk rife amid the AI frenzy, it's hardly a factor that should depress volatility.

Likewise, expansionary fiscal policy in America, Germany, China and Japan may be underpinning growth but can hardly explain why bond markets are so calm heading into year end.

And yet accepted market gauges of implied volatility - Wall Street's VIX "fear index" and the equivalent Treasury market MOVE gauge - are firmly under wraps. The former is below long-term averages of around 20, and the latter hit four-year lows within the past fortnight.

The 42-day U.S. government shutdown may have exaggerated the bond market calm, with almost no official economic data coming out during that time. And two Federal Reserve interest rate cuts over the past two months clearly helped calm any bond market jitters, as did the central bank's decision to stop running down its balance sheet from next month.

Perhaps a test of this calm will come with the likely torrent of delayed data over the next few weeks, with many also suspecting a Fed pause in its easing cycle in December. But it's hard to imagine any of it causing more than temporary ripples.

EMBRACING LOW QUALITY

For individual stocks, the puzzle is even more complicated.

Societe Generale analyst Andrew Lapthorne pointed out this week that there's been a significant outperformance in the last quarter by high-volatility stocks - a painful hit for investment strategies concerned about the uncertainty and biased toward low-volatility, high-quality shares as a result.

A so-called "trash rally" that is most obvious in the small-cap universe has left many scratching their heads.

The U.S. Russell 2000 index, which contains many loss-making firms, is the prime example. The best-performing factors in recent months have been low share price, high volatility, short interest and bad balance sheets.

Lapthorne said this has clear echoes of the "meme stock" frenzy of 2021 and the retail speculation that drove it.

Importantly, the vast majority of options-related activity is now focused on these low-quality names.

In effect, it's these "trash stocks" that are drawing a disproportionate amount of the options plays, leaving the higher-quality and larger-cap stocks exposed to little or no such activity. That, in turn, is suppressing implied volatility gauges derived from the options market at both a single stock and overall index level.

"It has been the most expensive, highest-volatility names that have experienced by far the most extreme positive performance," the SocGen analyst wrote. "These are precisely the types of stocks that quant models typically avoid or take short positions against."

AWASH WITH MONEY

Complicated options speculation aside, a more prosaic reason for the resilience of markets cited by many asset managers is that there's simply an enormous amount of savings, wealth and overall liquidity still sloshing around the financial system.

By way of example, this year's annual UBS Global Wealth Report [file:///C:/Users/8004094/Downloads/global-wealth-report-09072025.pdf] showed global personal wealth rose 4.6% in dollar terms last year, with total wealth net of debt and inflation now rising at a compound annual rate of 3.4% since the year 2000.

What's more, it said the number of so-called "everyday millionaires" - those who have assets worth between one and five million dollars - has more than quadrupled since 2000 to about 52 million people. And this population collectively holds $107 trillion in wealth, 2.5 times higher in real terms than it was 25 years ago and close to the $119 trillion total held by those even richer.

The scale of wealth makes it difficult for markets to go to ground for very long.

"Buy the dip" is now so ingrained in market behavior - and has proven so successful for decades - that any shock capable of causing an enduring market crash now would have to be very large indeed.

The opinions expressed here are those of the author, a columnist for Reuters

-- Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn. Plus, sign up for my weekday newsletter, Morning Bid U.S. [https://www.reuters.com/newsletters/morning-bid-us/]

Market volatility subdued despite turbulent year https://tmsnrt.rs/3K0XY2F [https://tmsnrt.rs/3K0XY2F]

Global stocks, bonds and gold all rise https://tmsnrt.rs/4ozcldx [https://tmsnrt.rs/4ozcldx]

Societe Generale chart on low versus high volatility stocks https://tmsnrt.rs/3JZVLVd [https://tmsnrt.rs/3JZVLVd]

UBS chart on the geographical distribution of personal wealth https://tmsnrt.rs/3LCeBlN [https://tmsnrt.rs/3LCeBlN]

(by Mike Dolan; editing by Nia Williams)