“It sure is quiet out there… too quiet.” This Airplane! quote increasingly comes to mind when thinking about the capital markets these days. There’s been virtually no volatility for well over a month in US equities, at least the way we measure it: how many days the S&P 500 rises or falls by +1% in a given trading session.
There hasn’t been a 1% day for the S&P since June 7th, and it’s not just this summer that the market has remained tame. Consider:
- There were just 11 days when the S&P had a daily return of +/- 1% in the first quarter, compared to Q1’s average of 13 since 1958 (first full year of data). Three of those 1% days were negative, while the balance were positive.
- There were only 7 one percent days in the second quarter (4 down, 3 up), versus Q2’s average of 13 over the last six decades.
- The quarterly average for Q3 is also 13, but there has been none yet. None!
- There has been a total of 18 one percent days so far this this year compared to the annual average of 53 over the past 60 years. If there were normal market churn, there would be about one 1% day a week, but there hasn’t been any in +7 weeks.
This lack of volatility is not only unusual for a typical year, but especially this late into an economic cycle:
- Our bar chart of annual S&P 1% days after this section shows a clear pattern over the last six decades. Large market swings happen during the beginning of a bull market, abate and then climb again towards the end of annual sequential gains in US stocks.
- This last cycle has been more mixed than usual. The post-Great Recession low will likely be 8 one percent days in 2017. Last year was more in keeping with late cycle norms at 64 one percent days versus the annual average of 53, but this year is running well below pace at 18.
Even though it’s been a quiet year so far, we think that could change. Here’s what we expect for the rest of 2019:
- Another way we track volatility is by counting how many times the VIX has peaked or troughed during each month of the year since it was created in 1990. By this measure we were not surprised trading activity was mild in July, as the VIX has bottomed the second most number of times at 6 during this month (December is most commonly “trough VIX”).
- By contrast, seasonal trends show volatility could ramp higher next month as the VIX has peaked 5 times in August, one of two months tied for the most number of highs for the year. October is arguably even more volatile with the VIX having peaked 5 times during this month, while never bottoming. September could also be choppy, as the VIX has peaked twice and never troughed during that month.
- Markets typically quiet down in November and December. While the VIX has reached its high for the year twice in November, it has also bottomed three times during that month. The VIX has hit its high for the year in December once, but has troughed eight times which is the most of any month.
Bottom line, we’re still bullish on US equities for the year, but are exercising more caution through October. Despite trade uncertainty and fears of a global economic slowdown, central banks around the world are now back in easing mode which has dampened volatility and could continue to do so. History says, however, that there should be more churn over the next three months. That’s not necessarily a bad thing and more in line with how “healthy” markets trade. It’s too quiet indeed…
As for our movie reference, here is a link to the famous scene from Airplane! on YouTube.