To say that the stock market has become a low-volatility game this year is definitely an understatement. For example, it has now been two months since the last time the S&P 500 dropped by 1% or more and according to Ned Davis Research, this is now the longest stretch without even a 3% pullback since the 1990’s. So, my first point on this Tuesday morning is that it is important to recognize that what we’re seeing now isn’t exactly “normal.”

Think about it; the stock market has had all kinds of what might normally be viewed as negatives thrown at it in 2017 including failures in Washington, political scandals, rate hikes, something now being called “quantitative tightening,” some natural disasters, and even the threat of war. And yet, with the exception of a couple missteps along the way, stocks have marched steadily higher – especially over the last couple of months.

The question, of course, is why is this happening? Why have the bears been stymied to such a degree? And is this the new, new normal?

The easy answer is that the economy is doing just fine, thank you, the consumer is enjoying their “happy places” again, and corporate earnings are growing at a pretty good clip. Neither earnings nor GDP are great, but, as I opined yesterday, they appear to be “good enough” to keep the ball moving down the field.

I could probably leave the topic right there as it is oftentimes best to keep things simple in this business. And the bottom line here appears to be pretty simple – good economic growth and good earnings mean higher stock prices.

However, Morgan Sizer, the head trader at our firm (and a real pro!) came up with an equally “simple” answer to the question of why volatility has been so low this year.

Morgan offered his thought via our company’s investment committee messaging network yesterday:

I have a theory. I was just thinking – I would guess that money flowing into passive funds is, for the most part, long-term. As such, there is money flowing into these funds every month for retirement contributions. The key is there is no fund manager who is reacting to news, earnings, rumors, etc., for these funds. Therefore, it makes sense that the bias would be for stocks to go higher with lower volatility. Before passive funds took over, you would have fund managers reacting to positive and negative news events and acting accordingly, adding to volatility and/or selling pressure. In conclusion, passive funds reduce volatility and add an upward bias to the market. Food for thought…