The eerie calm in markets is no reason to expect a sell-off
On Friday, the Dow Jones Industrial Average extended its streak of record high closes to 11 trading days.
Over that period, the blue chip index is up nearly 4% and, along with the Dow’s push to new records, so too have the benchmark S&P 500 and tech heavy Nasdaq hit new milestones. And perhaps even more notably, the S&P has now gone 93 days without a 1% decline.
This push higher, however, has come amid a drop in both realized and expected volatility and is on happening against a background of uncertainty around policies coming out of the Trump administration.
So, should this eerie calm and seeming contradiction between markets and the news cycle unsettled investors? According to Goldman Sachs’ David Kostin, market history says no.
“Long periods of market stability are not good indicators of drawdown risk,” Kostin wrote in a note to clients on Friday.
“Since 1980, there have been only six instances of the S&P 500 trading for 80 or more consecutive days without a 1% decline. Following the end of these stable market periods, the S&P 500 actually registered a positive three-month return in five of six episodes, with a median 6-month return of 9% and a 12-month return of 15%. In short, following previous periods of market stability, the S&P 500 usually continued to march higher.”
The takeaway here, as usual, is that stocks usually go up. As Warren Buffett wrote in his latest annual letter to Berkshire Hathaway (BRK-A, BRK-B) shareholders this weekend, the stock market is “virtually certain” to be worth far more in the future.
And data from Bespoke Investment Group shows that following each of the Dow’s winning streaks of 11 days or more — there have only been 8 others in history — the index has been higher over the next three months.
But as we highlighted last week, market history shows that most years see markets drop 10% or more from a recent high. And while stocks usually finish the year as measured from January 1 to December 31 higher, these intra-year drops are the kinds of events that can shake the confidence of uncertain investors.
David Rosenberg at Gluskin Sheff said of a potential market drop that, “The question is only one of timing and magnitude,” adding that sell-offs have usually been event-driven.
Kostin added that potential policy disappointments from the Trump administration, an unexpected interest rate hike from the Federal Reserve, or the outcome of European elections could be the catalyst to shake markets from their recently complacent posture.
But until a catalyst does materialize, the absence of volatility in markets is not an in and of itself sufficient condition to expect volatility in the future.
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Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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