The S&P 500 just did something it hasn’t done in 7 years The S&P 500 just did something it hasn’t done in 7 years
The S&P 500 is on pace for its 72nd straight trading session without a gain of 1 percent or more — its longest such streak since early 2007.
The implications of this kind of historical market calm that's been the subject of much debate across Wall Street this year are concerning to some strategists who believe low volatility (while the market grinds to all-time highs) is the so-called calm before the storm.
The last time the S&P posted a gain larger than 1 percent in a single trading session was on April 24, with a gain of 1.08 percent.
This relative market quiet "definitely" concerns Mark Tepper, founder and president at Strategic Wealth Partners.
"The fact that the VIX is near all-time lows, the fact that volatility is so low ... that is really signaling a lot of investor complacency, and that is typically a contrarian indicator. We saw similar levels in the VIX back in 2006, and we all know what happened in 2007," Tepper said Thursday on CNBC's "Trading Nation."
In 2006, the CBOE volatility index vacillated between the low 10's and at one point 23, in mid-June, before quickly falling. The stock market was similarly going stretches of time that year without daily gains and declines greater than 1 percent.
"The market right now seems to be priced for perfection, and it's not pricing in a lot of those big geopolitical risks ... so we are a little bit concerned," Tepper said, adding that despite this concern his firm is indeed overweight equities and will continue such an overweight position in equities for at least another year or so. But he would expect volatility in the market to pick up over the course of the next year and will then reduce exposure at that time.
But, Tepper said, he would expect volatility in the market to pick up over the course of the next year and will then reduce exposure at that time.
In a note to clients last week that was widely speculated to have sparked a midday sell-off, prominent JPMorgan quantitative and derivatives strategist Marko Kolanovic wrote that low volatility ought to give "pause to equity managers."
Furthermore, he recommended that investors hedge their portfolios to prepare for a market decline.
To Matt Maley, equity strategist at Miller Tabak, volatility will likely return to the market, and though he is somewhat concerned with low levels of implied volatility in the VIX, his anxiety is more muted than others:
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A trio of speeches from Fed officials indicated a wariness about asset bubbles.
Years of easy-money policies by the Federal Reserve have powered the U.S. stock market. Now, Fed officials say they are watching closely for signs that those policies are prompting risky market wagers.
A series of speeches from Fed officials Tuesday indicated a wariness about asset bubbles and hinted that the Fed may tighten monetary conditions even if key economic signals remain subdued.
As The Wall Street Journal’s Morning MoneyBeat newsletter noted, the notion that central bankers will be quick to support markets to help achieve stable prices and full employment has been validated many times since the financial crisis, but it may lose sway should Fed officials see rising bubble risks.
In remarks prepared for delivery at an International Monetary Fund conference, Federal Reserve Vice Chairman Stanley Fischer pointed to rising stock valuations, thin corporate bond spreads and ultra-low readings on the CBOE Volatility Index as signs of increased risk-taking. While such rising prices have yet to inspire extreme leverage, he said, valuations bear monitoring.
Fed Chairwoman Janet Yellen said in a separate speech that asset valuations were “somewhat rich.” San Francisco Federal Reserve Bank President John Williams told the Australian news media that there are signs of “some, maybe, excess risk-taking in the financial system with very low rates.”
Market behavior has been unusual in 2017 with prices of many assets types moving higher together. The S&P 500 is just below its all-time high hit June 19, while the yield on benchmark 10-year Treasury notes this week plumbed its lowest level since November. Gold is up 8.4% in 2017, slightly more than the S&P 500′s year-to-date return excluding dividends.
Tom Porcelli, chief U.S. economist at RBC Capital Markets, said that the speeches together highlight that the Fed, burned by asset bubbles in the past, will likely be comfortable raising rates if asset prices represent a risk to the economy.
“If the Fed thinks that risk appetite is heading toward unsustainable levels that put financial stability at risk, they are more likely to stay the course on removing accommodation even in the face of softer inflation,” Mr. Porcelli said.
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Livio S. Nespoli has been a broker, registered investment advisor, and financial publisher since 1985.