NEW YORK (Reuters) - Trading volumes have dropped across financial markets, raising questions about the strength of the stock market's rally or whether an ebb in momentous news has created a surprising void for traders.
Concerns that global growth may be tapering off, volatile oil prices, Japan's nuclear debacle and the dramatic events in the Middle East have left markets edgy, without a doubt.
Low volumes may suggest disinterest or fear on the part of investors and can signal a market vulnerable to selling pressure.
In addition, a potential crest in strong corporate profit growth and the festering European debt drama suggest that uncertainty over the market outlook will reign into 2012, said Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh.
"All in all, I do not get the impression that investors have longtime horizons at present; they are keeping their portfolios relatively restrained," Milligan said.
While risk assets have recovered reasonably well after the toppling of two governments in North Africa and the shock of the massive earthquake and tsunami in Japan, they have also left a news vacuum following the mega events.
"Investors don't trade unless there's a reason to trade," said Rex Macey, chief investment officer at Wilmington Trust Investment Management, where he helps oversee $17.1 billion in assets under management.
"When you get events such as Japan, the Mideast, there's reason to trade," said Macey, who is based in Atlanta. "Right now we're in a bit of a lull, we're just at the end of a quarter waiting for earnings season to kick in."
The stock market has been climbing a wall of worry, which always keeps investors on tenterhooks, albeit shares are still rising on weak volume, Macey said.
About 7.9 billion shares have traded daily so far this year on the New York Stock Exchange, NYSE Amex and Nasdaq, below last year's estimated daily average of 8.47 billion.
Trading volume in U.S. oil futures has been more than one-third below the recent monthly norm the past two weeks after concerns about Middle East unrest and Japan's nuclear crisis pushed many traders to the sidelines.
Milligan said that one potential reason trading volumes have eased is that investment banks have fewer proprietary desks and smaller amounts of capital for their trading operations.
Since the Dodd-Frank act was passed in July, Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America and Citigroup have taken steps to unwind their proprietary trading desks. The Volcker rule will make it illegal for these banks to use their own capital to trade for profit.
While it's unclear how much trading will be affected by the law because regulators are still fleshing out the details, at least 400 employees have been let go or left those banks to join other trading operations.
That less money is sloshing through the stock market is a sign that investors may have slowed their pace of selling the past two years, said Jeff Kleintop, chief market strategist at LPL Financial in Boston, which serves more than 12,000 financial advisers.
"The volumes reflect a market in transition to a period of much more modest performance than that of the past two years," said Kleintop. "Many market participants have been more focused on commodities markets, where volumes are way up. Especially for hot areas like silver," he said.
Money flows into mutual funds has been tapering off in recent weeks and plunged to $2.18 billion in the week ending March 23, down from $7.89 billion a month earlier, according to the latest data from the Investment Company Institute.
Equity funds have been receiving flows since November while municipal bonds have seen outflows, reversing a recent trend, monthly ICI data shows. Money market funds still see outflows.
(Additional reporting by Lauren Tara LaCapra; Editing by Dan Grebler)