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 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

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