With the S&P 500 and the Dow up this year 17% and 20%, respectively, individual investors are finally getting more bullish about growth prospects. Usually late to the party, these investors are often looked at by the institutional folks as a contrarian indicator.
After many months of quiet gains in the stock market it's natural that some investors start assuming this will last forever, that we've entered a new low volatility growth paradigm, or something like that. But markets don't go up in a straight line indefinitely. It's during the good times that we need to remind ourselves of market fundamentals, and sometimes even of Newton's law of universal gravitation.
As I have written previously, volatility in the stock market has been very low for most of the past year. The market's "fear gauge", the VIX, has been stuck around a historically low reading of 10 for months, only showing minimal and brief spikes this past spring and summer. As quick as volatility rose it subsided and the stock market barely budged during these short stints of "fear". The futures markets would often indicate a negative opening for stocks, but prices made a habit of grinding higher during the day. This, on top of the market seeming impervious to any number of negative-sounding headlines, has led many to nickname this the "Teflon market".
The S&P 500 has only experienced a daily decline of 1% or more four times this year. This is the fewest number of days for this metric since 1964, still the least volatile year on record. The S&P's average daily change of plus or minus 0.31% is the lowest since then as well.
So, we have a situation this year where stocks have been making repeated record highs on record low volatility. In reality, we haven't seen meaningful amounts of volatility since 2015 and then a rather muted response to Brexit during the summer of 2016. This is leading some commentators to call current market conditions "boring". Well, on one hand I see their point, but on the other hand it's important not to let boredom truly set in as it can easily lead to complacency.