Some things just can’t last. The nearly magical stock market that has persisted so valiantly this year is one of them.
The bull market that started in March 2009 seems to have gone on forever, but that’s only a small part of the story. What is astonishing is the way stocks have risen in 2017. The stock market has been so placid that declines of a mere 1.5 per cent have been treated like real news.
The Standard & Poor’s 500 index dropped that much August 17. Days like that can be unsettling, but in the span of market history, they amount to the slightest of headaches. The deeper news isn’t immediately visible day to day, but it is this: The stock market has been operating in an extremely rarefied world of heightened calm, one that is unlikely to continue.
It is as if, after the election in November, Wall Street entered an enchanted zone. That is bound to end. Several statistical measurements demonstrate how unusual this market environment has been.
The most obvious is the bull market’s longevity, fuelled largely by the Federal Reserve’s ultralow interest rates and voracious bond buying. The upward trend in stocks ranks as the second longest in American history since 1900 and the third highest in percentage gains, according to a tally by Bespoke Investment Group. From the trend’s start, in 2009, through its latest high, on August 7, the Standard & Poor’s 500 has risen 267 per cent.
But that’s not all. By one standard — the market’s average daily movement, measured against its trend for that year — stocks in 2017 are the steadiest they have been since 1965. On Wall Street that year, a young man named Warren Buffett gained effective control of a textile firm called Berkshire Hathaway, making it the vehicle for a legendary investing career.
“That was so long ago that there are very few people left who were active then and still actively trading now,” said Salil Mehta, the statistician who performed that calculation (technically, he found the average absolute deviation of the S&P 500 index) at my request. “It is difficult to appreciate how unusual 2017 is,” Mehta said, “or to use the distant past to draw lessons about it.”
Clearly, though, neither then nor now, political turmoil had little or no effect on the pervasive calm in the stock market. Mehta, former director of research and analytics for the US Treasury’s Troubled Asset Relief Programme, pointed to several other indicators of uncanny market placidity this year.
For example, the VIX index, widely known as Wall Street’s gauge of fear, has remained very low, on a historical basis, despite recent spikes. Data from the Chicago Board Options Exchange shows that even when the VIX has risen this year, it has not even reached its average since 2004. And despite occasional bursts of market-driven angst, the downturns in 2017 have been paltry.
Ryan Detrick, a senior market strategist for LPL Financial, has found that the S&P 500 through August 11 has not had a 5 per cent decline, from peak to trough, since June 28, 2016. That sell-off, 6.1 per cent over several days, occurred after Britain’s surprise vote on June 23, 2016, to leave the European Union.
Amid the panic that week, I wrote that markets had appeared to have bottomed: “One day, perhaps three or four months from now, they are likely to look even better, until the next crisis comes.”
That turns out to have been an understatement. There has not been another downturn that big since then, though there have been plenty of political crises. Going all the way back to 1950, Detrick has found, the current streak is the fourth-longest in history without a 5 per cent decline.
Other measurements show the same pattern. For the three weeks through August 10, the closing levels of the S&P 500 never had a daily swing of more than 0.3 per cent, Detrick said: “That never happened before in the history of the S&P 500.”
And for 2017, the average daily trading range has been 0.55 per cent, the lowest ever. “We have been living in a very unusual world,” Detrick said, “and I don’t think we are going to stay here for very long.”
Similarly, Mehta said this stretch of smooth sailing has gone on for so long that it has become statistically improbable. That isn’t a firm prediction of a decline because the future is uncertain. But, he said, it is quite likely that a stock market decline of at least 5 per cent — from peak to trough — will be coming in the not-too-distant future.
“Mere reversion to the mean is likely,” Mehta said. “From a probability standpoint, the run we’ve been on is very rare, and it’s likely that we’ll return to something more normal relatively soon.”
Will there be a downturn big enough to derail the bull market? Of course. But, alas, no one knows when it will happen.
In traditional Wall Street parlance, a bull market ends and a bear begins with a drop of 20 per cent from the market’s last peak, which happens to have occurred on August 7, when the S&P closed at 2,480.91. The market has dropped 1.9 per cent since then.
It hasn’t had a 3 per cent decline since before the November election, in the longest such streak since 1995, Detrick said. We are long overdue, he said, adding that he expected “a very healthy decline of 5 per cent or more,” which would be “a buying opportunity for people who have stayed out of the stock market.”
Stock valuations are stretched, he said, but when you factor in low interest rates and low inflation, current prices are reasonable, in his view.
“Bull markets don’t die of old age, they die of excesses,” Detrick said. And there is no indication, he added, that an end to the market’s long-term rising trend is imminent.
Still, the stock market is linked, even if tenuously, to the real economy. And like the bull market, the economic recovery from the last recession has gone on for an extremely long time. The economic expansion in the US is the third-longest since 1854, according to Alan Blinder, a Princeton economist, citing data from the National Bureau of Economic Research.
If there is no recession until June 2019, he said, this will become the longest period without a recession. One of these days, these various streaks will end.
A big stock market decline could well precede and predict a recession. But barring a disastrous geopolitical, economic or financial shock — there are plenty of possibilities, take your pick — it is likely that both the bull market and the economic recovery will keep grinding on for a while.
But don’t count on it. We are pushing our luck. Even if you believe in magic, the markets rarely stay calm and buoyant for such an exceedingly long time.
New York Times News Service
