Fear Factor. Roiling markets can be good for growth.
Japan's earthquake spoked investors. But the jitters could actually help U.S. markets grow. After Japan's disaster, the market's "fear gauge", a measure of volatility called the VIX, nearly doubled to 29 from its mid-February low, the biggest jump in 10 months. That put a damper on stocks; the S&P 500 dropped 6% the same month. Rising volatility and falling stock prices typically go hand, since fear makes investors recoil from riskier bets. But the opposite is also true: when volatility starts to fall, stock prices usually begin to rise. And some experts believe that during bull markets like this one, spikes in volatility can be a healthy catalyst fro growth. "After a reality check like Japan, people think, What hasn't killed us makes us stronger" says Auerbach Grayson analyst Richard Ross.
After its initial spike, the VIX dropped 45% in the week after Japan's quake, the biggest dive in the index's history. Since then, volatility has hovered around 17, below its average of 18 last year and 27 in 2009. And stock prices are on the rise. Of course, volatility could bounce back. Troubles aren't over for Japan, Europe or the Middle East. But in the next year, Goldman Sachs predicts, volatility will continue to fall, as investors adopt to those risks and as the U.S. economy improves. While Japan seemed like a major market event, investors have already moved on.
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