In stocks, volatility is back. The S&P’s 500 index, which never went more than three days without a gain in 2014, has twice fallen five straight times since January.Jin Lee/Bloomberg
Nobody said waking up from six years of the U.S. Federal Reserve-induced slumber would be easy.
In stocks, volatility is back. The S&P's 500 index, which never went more than three days without a gain in 2014, has twice fallen five straight times since January. Daily equity moves exceeding 1 per cent have jumped 50 per cent from last year and shares tumbled 3 per cent or more over four different stretches in the first quarter.
What seems like chaos is a return to normalcy for 70-year-old investor Chris Bertelsen, who says the end of Fed stimulus is long overdue in a market that has tripled since 2009. Volatility indicators bear a resemblance to 2007, the final year of the previous bull market – which this one now exceeds by 12 months.
"We are so skewed by the readily available quantitative easing and that was the abnormal," said Mr. Bertelsen, chief investment officer of Global Financial Private Capital LLC, a Sarasota, Fla.-based wealth manager. "For many investors, particularly those that haven't seen a period of time like this, it does create queasiness."
The market hasn't been this turbulent since the European debt crisis three years ago as volatility in currency and energy markets spill over to equities and Fed policy makers signal a rate increase by mid-year.
Less than three months into 2015, the market has seen 15 days when the S&P 500 rose or fell 1 per cent or more, compared with 10 days a quarter in 2014. While the index is little changed for the year and has gone 41 months without a 10-per-cent tumble, it's had more retreats of at least 3 per cent than any time since 2011, data compiled by Bloomberg show.
"What we're seeing in the market today is a preview that this is going to be a more volatile year and investors should be positioned," said Jim McDonald, the chief investment strategist at Chicago-based Northern Trust Corp.
Calm is evaporating just as stocks seemed back on track, with the Nasdaq composite index above 5,000 and the S&P 500 at an all-time high at the start of the month. The S&P 500 fell 1.4 per cent on March 6 after a surge in hiring fuelled speculation the Fed may accelerate its interest-rate tightening schedule. The index posted the second-biggest loss of the year on March 10, dropping 1.7 per cent.
Rising volatility has coincided with 10 out of the past 13 market peaks since 1946, data compiled by Bloomberg show. In 2007, when the S&P 500 climbed to a record in October, the average daily move widened to 0.72 per cent from 0.47 per cent a year earlier. As concern over subprime mortgage contagion and hedge fund losses exacerbated selling, the number of days with the index swinging at least 2 per cent surged to 17 from two.
"We're seeing the parallel," said Lucas Turton, chief investment officer for Boston-based Windham Capital Management. "What tends to happen is an almost avalanche effect that as risk begins to rise, it's self-perpetuating. Not to call a market crash today, but this is a period to be more defensive."
Volatility is poised to rise further, according to Sam Stovall, an equity strategist at S&P Capital IQ. He studied stock performance during the last 16 tightening cycles and found that 13 of them were preceded by equity losses over the six months before the first rate hike. On those occasions, the S&P 500 fell a median 10 per cent from peak to trough.
Options traders are embracing hedges with the bull market, at almost 2,200 days, about two months away from overtaking the 1974-1980 run as the third-longest since 1929. The Chicago Board Options Exchange Volatility Index, a gauge of costs for S&P 500 options, has jumped 20 per cent this month. Still, at 16, the VIX is 20-per-cent below its average since the inception.
"We'll only get back to a more normal market mechanism when we get back to more normal monetary policy," said Scott Clemons, the chief investment strategist at Brown Brothers Harriman Private Banking from New York. "Volatility is certainly heightened, and I believe it's here to stay."