The world’s financial markets are supposed to be hugely exciting. The ups and downs of shares on Wall Street, trading opportunities galore, each day bringing a new challenge and another crisis out of left field.
That’s what attracts people to the industry, and why those involved can’t help but follow the action around the clock.
However, we haven’t seen much of that at all during the last few years.
Very little excitement, few thrills, hardly any volatility. To be honest, markets have been fairly boring.
Usually, that would be a good thing. Safe, steady and predictable is exactly what most of us want from our investments. Noted economist Paul Samuelson once said “Investing should be like watching paint dry or watching grass grow.” A great quote, and very true.
But today, the calm is a little unnerving.
In the last year, there have been just nine days where the S&P 500 in the US has moved more than one per cent (in either direction). Just nine out of 250 trading days. That’s an exceptionally stable market.
It’s well below the long-term average (since 1950) of 50 days per year. In fact, to find another 12-month period where there were so few days with a one per cent move, up or down, we need to go all the way back to 1966.
Another way to highlight just how little volatility we’ve seen in recent times is by looking at the Volatility Index, commonly known as the VIX.
Referred to as the ‘fear gauge’ for Wall Street, the VIX has been around since 1990 and is a reasonable barometer for nervousness. In short, it reflects the market’s expectation of future volatility, based on the prices people are paying for options.
Options are contracts that give people the right to buy or sell a security at a specific price, sometime in the future. Some use these as an insurance policy against prices going against them, while others speculatively trade them.
The VIX is imprecise, but it’s still a useful gauge of volatility, and it fell to an all-time low a couple of weeks ago.
While many will be enjoying this stability, I think a little too much complacency might have set in. That’s worrying because it means many investors, and even many market professionals, might not respond well to the inevitable return to normal.
The ups and downs are also a vital part of how long-term investors do well. Without regular sell-offs and the odd bout of market anxiety, we don’t get the buying opportunities we need to pick up bargains.
It’s hard to predict what will ultimately drive the return of volatility, but there are a multitude of contenders. It could be increasing geopolitical tension, the reversal of quantitative easing or a negative economic shock in one of the major economies.
I’d rank the shifting policy stance from some of the world’s big central banks fairly high on that list, but we’ll have to wait and see.
Regardless of what the trigger is, volatility will inevitably return and normal service will surely resume. Ironically, when that happens many of us will breathe a sigh of relief.
This article was published in the New Zealand Herald, Sunday 26 November 2017 under the title ‘Mark Lister: Wall Street too quiet for comfort’.
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Mark Lister is Head of Private Wealth Research at Craigs Investment Partners, his Adviser Disclosure Statement is available on request and free of charge under his profile on craigsip.com. For personalised investment advice please contact a Craigs Investment Partners Investment Adviser or phone 0800 272 442. This column is general in nature and should not be regarded as specific investment advice. Craigs Investment Partners do not accept liability for the results of any actions taken or not taken upon the basis of this information. While every effort has been made to ensure accuracy, no liability is accepted for errors or omissions herein.
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