Low volatil­ity in mar­kets as stocks inch to record highs

Cen­tral banks’ moves likely to set off swings

The Washington Times Daily - - NATION - BY STAN CHOE

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.

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