“However you measure it, stock market volatility is unusually low.” – Liberty Street Economics
As you’re probably already aware, 2017 ended up being a fantastic year for the stock market. After many years of post-financial crisis gains, major indexes once again marched steadily to new records. The S&P 500, in fact, finished every month of the year in positive territory for the first time in its long history. We have seen every measure of consumer, business and investor sentiment improve dramatically in the face of consistent positive surprises from domestic and global indicators of economic activity.
But what defined the year even more than all the fanfare, in our opinion, was the complete absence of volatility. Gains were generated in a slow, steady grind higher that might appropriately be described a consistent, positive “Slowmentum”. While this reality doesn’t carry a whole lot of excitement on the surface, the stats are pretty amazing when viewed within the context of historical norms. We wanted to share a few charts that will provide some context of what we’re seeing.
First, as the chart below shows, today marks the second longest streak ever of trading days without a correction of 5% or more for the S&P 500. We are only seven days away from the all-time record set in the mid-90’s, so it’s highly likely that we will blow through that level and set a new high mark. It will be interesting to see how much longer the market grinds higher without at least a minor pull back.
Next we look at the CBOE Volatility Index (the “VIX”), which measures the implied volatility currently being priced into S&P 500 option contracts. This index is a measure of how much risk or uncertainty is being priced in, and is often referred to by its nickname, the “Fear Gauge”. It spent much of the last year in single digits which historically has been relatively unheard of. The chart below plots its level on a rolling 12-month basis, which as of the end of last year was sitting at the lowest point on record since its inception in the early 90’s. In other words, the market appears to be as indifferent to risk as it’s been at any point in nearly three decades.
Finally, while the VIX measures implied/expected volatility, the chart below maps out the actual/realized volatility of the S&P 500 as measured by the annualized standard deviation of rolling 12-month returns. Again we see this measure ending 2017 at a record low level going back all the way to 1950.
In summary, while it’s true that major indexes set new price level records in 2017, what’s equally as interesting to us is the record low level of volatility exhibited along the way. There isn’t any strong predictive conclusions embedded in the data above, but we do think it’s important to consider a year like 2017 within a broader historical context. Psychology plays a huge role in how we behave as investors, and if we’re not careful “recency bias” can lull us into simply projecting recent market behavior into the future. Maintaining a bigger view and putting current realities into perspective is an important part of making sound long-term investment decisions. Given our reliance on trend-following models in our stock market allocations, the recent slowmentum has us fully invested to our long-term targets in stocks…for now.
Author David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.
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