An­other mile­stone for stocks: Most bor­ing mar­ket in decades

WALL STREET OVERVIEW

Kuwait Times - - BUSINESS -

NEW YORK: This year’s run to a record for the stock mar­ket has been one of the least event­ful in decades. Just don’t get too com­fort­able. Only twice this year have in­vestors had to deal with a 1 per­cent drop for the Stan­dard & Poor’s 500 in­dex in a day. That’s far fewer than typ­i­cal. The last time stocks sailed through such an un­event­ful first seven months was when a group of bur­glars was ar­rested for break­ing into the Water­gate com­plex in 1972. Broaden the scope to in­clude when the S&P 500 fell or rose by 1 per­cent in a day, and this could be the least volatile year for stocks since 1964, if the cur­rent pace holds.

But as cen­tral banks start to wean mar­kets off the stim­u­lus they’ve in­jected into the global econ­omy, many money man­agers say they’re pre­par­ing for a bumpier ride ahead. For now, mar­kets have been so calm that the big­gest loss for the S&P 500 last week was just 0.2 per­cent. Com­pare that to the whiplash in­vestors felt dur­ing the sum­mer of 2011, when the S&P 500 swung by more than 4 per­cent each day dur­ing one four-day stretch. In­vestors for­tu­nate enough to be in the mar­ket have en­joyed all the up­side of own­ing stocks with al­most none of the tra­di­tional down­side. Stocks are sup­posed to be volatile, and in­vestors have long ac­cepted that hav­ing to stom­ach big swings in price is one of the costs of own­ing them. But the largest stock fund by as­sets, Van­guard’s To­tal Stock Mar­ket In­dex fund, has al­ready re­turned 11 per­cent in 2017 with only a few big down days.

“At the sur­face, it is sur­pris­ing” how calm stocks have been, said Greg Davis, Van­guard’s chief in­vest­ment of­fi­cer. “But it’s not sur­pris­ing if you think about a world where cen­tral banks have been un­be­liev­ably ac­com­moda­tive. I think in­vestors still think cen­tral banks will step in if there’s any stress in the fi­nan­cial mar­kets.”

The Fed­eral Re­serve and other cen­tral banks around the world have slashed in­ter­est rates and thrown tril­lions of dol­lars of stim­u­lus at the global econ­omy since the 2008 fi­nan­cial cri­sis. Not only that, prof­its for S&P 500 com­pa­nies started grow­ing again late last year, in­fla­tion re­mains low and economies around the world fi­nally seem to be in a syn­chro­nized move higher. All that has helped con­vince in­vestors to step in as buy­ers when­ever stocks seem vul­ner­a­ble to a slide, which keeps mar­kets smooth. But the Fed is now slowly mov­ing in the op­po­site di­rec­tion: It has raised short-term rates mod­estly three times in the last year. The cen­tral bank also ex­pects to be­gin par­ing its vast port­fo­lio of bond in­vest­ments “rel­a­tively soon.” In­vestors on both sides of the At­lantic, mean­while, are hand­i­cap­ping how long it will be be­fore the Euro­pean Cen­tral Bank pulls back on its bond-buy­ing pro­gram.

That could force a re­turn to more typ­i­cal lev­els of volatil­ity. Over the last half cen­tury, the S&P 500 has had a me­dian 26 days where it fell by at least 1 per­cent dur­ing a year. The worry is that the stock mar­ket may not only get back to that level but over­shoot it. Stocks are pricier, which raises the risk: One pop­u­lar mea­sure that com­pares stock prices to cor­po­rate earn­ings over the prior 10 years says the S&P 500 is at its most ex­pen­sive level since the dot-com bub­ble in 2001.

If cen­tral banks aren’t the trig­ger to reawaken mar­ket volatil­ity, an­a­lysts say it could be any­thing that comes as a big sur­prise to in­vestors, such as a nat­u­ral dis­as­ter, in­ter­na­tional con­flict or un­ex­pected drop in cor­po­rate prof­its.

In a re­cent sur­vey of in­vest­ment man­agers at about 100 firms by North­ern Trust As­set Man­age­ment, 63 per­cent called the mar­ket’s lack of volatil­ity a warn­ing sign that may lead to a sell-off for stocks. That’s even though half the re­spon­dents ex­pect cor­po­rate profit growth to in­crease, and most fore­cast sta­ble eco­nomic growth, con­di­tions that are typ­i­cally fa­vor­able for the stock mar­ket.

“Volatil­ity is so low, and so much hope is baked into cur­rent prices, that it has the po­ten­tial to dis­ap­point,” said Rob McIver, port­fo­lio man­ager at Jensen In­vest­ment Man­age­ment. Of course, stocks have re­mained calm this year even in the face of some typ­i­cally un­nerv­ing events. Wash­ing­ton has been un­able so far to meet the big ex­pec­ta­tions in­vestors had at the start of the year for pro-busi­ness re­forms. North Korea had its first suc­cess­ful test of an in­ter­con­ti­nen­tal bal­lis­tic mis­sile.

The price of oil is still bounc­ing up and down. Strate­gists at Black­Rock, the world’s largest as­set man­ager, say they think the calm mar­ket is partly a re­sult of how un­usu­ally sta­ble growth has been for the econ­omy and that the mar­ket can re­main un­ruf­fled as long as the econ­omy holds up. —AP

NEW YORK: Trader Ron­ald Franco works on the floor of the New York Stock Ex­change yes­ter­day. US stocks were lit­tle changed in early trad­ing as tech­nol­ogy com­pa­nies rose and en­ergy com­pa­nies slipped with the price of oil. —AP

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