As ‘sleepy’ markets doze, bull tiptoes along
U.S. stocks haven’t suffered a pullback for more than a year
Stocks keep hitting new highs in an unusually calm market that hasn’t flashed a fasten-your-seatbelt warning in more than a year.
The U.S. market hasn’t suffered a 5% drop — the common definition of a “pullback” — since the Brexit vote shocked investors in late June 2016. And that was 268 trading days ago.
The broader stock market hasn’t gone that long without a scare since the mid-1990s, when the Standard & Poor’s 500 stock index ended a pullback-free streak of 394 days in July 1996, according to data from Bostonbased LPL Financial.
It’s only the sixth time since 1950 the large-company stock gauge has made it at least a year without a 5% drop, says Ryan Detrick, senior market strategist at LPL.
“This is one of the most sleepy markets in history,” he says.
The S&P 500, which closed fractionally lower Thursday at 2473.45, has gained 21.5% since its Brexit low. That big return means a Main Street investor with $100,000 invested in the index on June 28, 2016, would now have an account balance of $121,500.
Turbulence in the stock market, history shows, has been a fairly regular occurrence. Since 1950, the average intra-year decline has been 13.6%. And in more than 90% of those years the market slid at least 5%.
The long pause between spooky declines is one reason why Detrick says the market could be susceptible to a fall of 5% to 7% at any time.
Hank Smith, co-chief investment officer at Radnor, Pa.-based Haverford Trust, says investors should always be on the lookout for a bout of turbulence.
“You know volatility is going to come back, you just don’t know when or what will cause it,” Smith says.
Investment pros such as Detrick attribute the market calm to a number of factors.
Market stability, they say, has been underpinned by a world of low interest rates, tame inflation and improving economies around the globe.
Those favorable business conditions and low odds of a U.S. recession, analysts such as Smith say, have been a boon for corporate profitability, the main driver of stock prices.
The collective earnings growth for companies in the S&P 500 in the first three months of the year was 15.3%, which is its most robust pace since 2011, according to
earnings-tracker Thomson Reuters.
And while growth in the latest quarter, April through June, is now estimated at 8.6%, many Wall Street pros expect enough U.S. companies to top expectations that the final earnings growth figures for the quarter could reach 10% or more.
The U.S. stock market is also benefiting from massive cash inflows into so-called passive funds, such as low-cost index funds and exchange traded funds (ETFs) that track the performance of market benchmarks such as the S&P 500, says Edward Yardeni, chief investment strategist at Yardeni Research.
Money pouring into stock ETFs since the start of 2016 totals more than $253 billion, according to the Investment Company Institute, a fund trade group.
Yardeni says the stock market has also benefited from the lack of big declines, as it has forced investors sitting on cash to put it into the market, even when stocks suffer small drops.
The market, he adds, has also concluded that political gridlock in Washington, D.C., and the stalled Trump agenda aren’t hurting the economy or the performance of companies.
In a sign of market strength, the S&P 500’s biggest drop this year totaled 2.8%, and if that holds up, it would mark the second-smallest drop in a year ever recorded.
Still, there are some things that could trip up the stock market and turn the sleepy summer into a more harrowing one.
Detrick notes that the market is heading into one of its worst seasonal stretches of the year.
“August and September,” he says, “are historically weak months. So the calendar could be worrisome.”
Investors, he says, could also suffer a jolt of doubt if the current corporate earnings season, which is off to a good start, suddenly turns negative. Yardeni warns that if stocks continue to “meltup,” already expensive stocks could get even pricier, prompting investors to sell them.
One thing is clear, after a period of relative calm, the next 5% drop in the market will get peoples’ attention, Detrick warns.
“When the inevitable 5% to 7% pullback hits,” he says, “it will shake people up and remind them that markets don’t always go up.”