Low volatility in markets as stocks inch to record highs
Central banks’ moves likely to set off swings
NEW YORK | This year’s run to a record for the stock market has been one of the least eventful in decades. Seemingly every day, stocks have drifted by just a few tenths of a percent in a lazy ascent to new heights.
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 is 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 pace holds.
Just don’t get too comfortable.
As central banks start to wean markets off the stimulus they have injected into the global economy, many money managers say they are 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 with 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, already has returned 11 percent this year 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 persuade investors to step in as buyers whenever stocks seem vulnerable to a slide, which keeps markets smooth.
But the Fed now is slowly moving in the opposite direction: It has raised short-term rates modestly three times in the past 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 bondbuying program.
That could force a return to more typical levels of volatility. Over the past half century, the S&P 500 has had a median 26 days when 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 also overshoot it.
Stocks are pricier, which raises the risk: One popular measure that compares stock prices with 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.