Markets Continue an Eerily Calm Trek Higher

Craig Goryl, CFA | Portfolio Manager

US and international stocks posted another quarter marked by positive returns and historically low volatility. An awful lot has been written about the quiet strength that currently pervades stock exchanges, so I thought I’d share a few thoughts on that topic.

How quiet has it been? There are a number of ways to measure market calmness… Most common is the standard deviation (SD) of daily market fluctuations- lower is less volatile. By this yardstick, the S&P500 has had 2 consecutive quarters with annualized SD below 8%, a feat not seen since 1993. The global “all country world” index SD has been under 7% for two quarters, which last occurred in 1996. Another measure is the VIX, known as the “fear index” which reflects the cost to buy insurance against a market crash. The VIX had its lowest average in over ten years in 2Q, signaling very few investors are seeking “protection.”

What is causing this subdued volatility? There are a number of factors at play here. The popularity of low-cost index investing means that most money entering the markets is being allocated proportionally and mechanically (some might say indiscriminately!) by size, resulting in stocks moving together. Another theory has to do with the global economic cycle being in a “Goldilocks” state: not too hot, not too cold. The Financial Crisis is now almost a decade behind us, global economic growth is stable, corporate profits are rising, inflation is benign, and money is widely available to borrow at low interest rates. If economic seas are calm, it makes sense that markets would be, too. Finally, it is clear from the comments of global central banks, including our Federal Reserve, that they keep a close eye on equities and are likely to increase money supply whenever the market gets rattled. The result is that traders have the confidence (possibly unfounded) that a safety net awaits, and they can buy on even the shallowest decline.

What does it mean for investors? Does calm beget calm, or portend turmoil? Volatility will return for sure, but no one knows when, or even in which direction. Rather than trying to time the next crash or rally, it is important to stay properly allocated. The dangerous side effect of easy money and low volatility is complacency; do not allow yourself to be lulled into thinking the current dull stock markets will stay that way.


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