Markets Stopped Being Boring in the First Quarter
After February, investors started freaking over almost everything.
Bloomberg, March 29, 2018
Our year-end review in early January noted how strange 2017 was: no matter where you looked, there were anomalies, aberrations and just plain weirdness.
Rarely have we seen a stretch where investors made such consistent, steady gains, with stock volatility at its lowest in a half-century. Perhaps the strangest data point: The Standard & Poor’s 500 Index was within 3 percent of its all-time highs for 202 consecutive days. The next closest streak was 1995-96, at 116 days, a little more than half as long.
The lack of market volatility was noteworthy, especially in the face of such unrelenting political volatility. As my head of research, Michael Batnick, likes to joke: “Last year, the market cared about nothing. This year, it cares about everything.”
Although this was said in jest, it does reflect the retrospective way many people see events and market action. But in reality, if you think these crazy headlines are creating market volatility this year guess again.
Last year, the U.S. launched missiles at Russians fighting in Syria, and the market closed up that day. The U.S. made ominous-sounding threats against the rogue regime of North Korea, and Mr. Market shrugged. President Donald Trump was beset by multiple scandals that could threaten his presidency and yet markets kept rising.
Compare that with this year, when tensions ratcheted up with North Korea and the S&P 500 took a thrashing.
Or how about a trade war? Trump got serious about that this year, and markets reacted in kind — negatively, that is. And yet, this should hardly be a surprise to anyone, since a populist-protectionist agenda is what the guy literally campaigned on.
Consider Facebook: Are the current privacy violations all that different from any of its myriad privacy dustups over the years? Think about the endless stream of warnings from security experts, the cascade of hand-wringing over wanton data sharing by millennials and the angst over how our personal data could be misused by nefarious players. There literally were tons of books written about this. All of that was well known, understood and ignored as Facebook’s stock price kept going up. Editors and cable news shrugged, and moved on to the next salacious story. This time, though, the privacy story had legs.
If you believe the market is even remotely efficient, and that it incorporates all known information into price, then none of the above should come as a surprise.
Last year was the outlier. This year is a return to normal.
Here is an astounding data point: As of yesterday, there were 22 times in the first quarter of 2018 when the S&P 500 index closed up or down 1 percent or greater. For all of 2017, that happened only eight times. To say we had very little volatility last year is a huge understatement.
Let’s try a little thought experiment: Imagine you had a little too much to drink on New Year’s Eve, and went to sleep it off for 12 weeks. You woke up today, and the first thing you did was log onto your brokerage account. You look at your balance — U.S., Europe and Japan down slightly, emerging markets up a little, and you might assume nothing much happened in the first quarter.
But to those who were awake the entire quarter, it sure felt worse than that. Momentum carried through into the new year, pushing up markets more than 5 percent in January. Markets gave all of that up and then some when those products linked to the VIX, or the so-called fear index, exploded, and markets took a shellacking. Markets crawled back to near where they were at the end of 2017, but the entire experience felt worse than it actually was.
Perhaps a little context might help: U.S. equities have enjoyed positive total returns for the past nine consecutive years — and during seven of those years, they saw double-digit gains. If God tweeted 1 at you on Jan. 1 that stocks would be little changed in the first quarter, I don’t think you would have been too upset by development.
Here is one last data point to chew over: The S&P 500 had a gain in January for the 13th time since the index was created. During the other 12 years that began that way, full-year returns were positive. Yes, that is an admittedly small sample set, and could be completely coincidental. Perhaps there is no predictive power at all in January’s performance, and this time will be different. I have no idea if this factoid is meaningful.
Deep down inside, you always knew volatility would return one day. That day turned out to be sometime last month. Markets always regress to mean. And all of that low volatility serves as a reminder that it was way too easy for investors to make money in equities in 2017.
As of the end of today, the first quarter of 2018 is over. Welcome to the rest of the year.