Traders Are Still Haunted by the VIX Five Months Later
(Bloomberg) -- It’s summer. But in the Florida offices of Raymond James & Associates and at brokerages around the U.S., February is still in the air.
Repercussions from that month’s rout won’t go away -- not in chats with clients, not in the market itself. Gone are the days when you could buy an exchange-traded fund tracking the S&P 500 and turn off the ringer. Look away for five minutes, and some customer is on the phone demanding to know what the latest swerve did to his portfolio.
“It’s not an investor’s market anymore. It’s a trader’s market,” said Andrew Adams, 32, an equity strategist for Raymond James in St. Petersburg. “There’s definitely much more hand-holding. I do a lot more talking than before.”
Things may be placid on the surface. But look closer and you see an equity landscape that has been altered by February’s surge in volatility, by some measures the worst since the financial crisis.
A procession of awful days is battering investor nerves. While most of 2018’s sessions have been up ones, when the market falls, it falls hard. Single-day drops are 20 percent bigger than gains, on average, the widest gap in seven decades.
“Each big selloff becomes more dangerous,” said Jerry Braakman, chief investment officer of First American Trust in Santa Ana, California. “Ultimately something is going to fail and take us to a bear market.”
A decline of that size -- 20 percent, by Wall Street conventions -- is a long way off, held back by the strongest earnings estimates in a decade. The problem for peace-loving investors is that while profit forecasts rarely announce themselves, alarms about threats such as Donald Trump’s trade crusades blare out by the minute.
Investors are like boxers who can’t get their legs. The worst blow landed in February, when the S&P 500 lost 10 percent in nine sessions, the fastest peak-to-trough correction since 1950 (the crash of 1987 began well below that year’s high). Halfway into the year, the S&P 500 has posted 36 one-day swings days of at least 1 percent, four times the total in all of 2017.
The average move in the S&P 500 is 0.7 percent this year, up from 0.3 percent in 2017. It’s a pace that if maintained would be the biggest increase on record.
This is the “adolescence of the regime,” said Michael Purves, an awakening of volatility that stimulates brokers and often makes them richer.
“There’s a much more robust story and it makes the job much more interesting,” said Purves, chief global strategist at Weeden & Co. in Greenwich, Connecticut. “You can bring much more money to your firm than before. But you can also lose a lot.”
Forces that had fortified bulls are turning traitor. President Trump, whose plans to cut taxes and ease regulations spurred a buying frenzy in December and January, is now waging a global trade war. The Federal Reserve has upped the pace of tightening, ending its role as the market’s biggest ally.
Over at Leuthold Group in Minneapolis, they rank equity downdrafts by degrees of pain. An “intermediate correction” is what everyone hoped February’s was -- a plunge that never gets worse than about 12 percent. The odds of it being one of those are shrinking. Of 33 such episodes over the last seven decades, only one has taken longer to erase.
The exception was in 1994, a selloff that also began in February and lasted two years. Like now, the second year of Bill Clinton’s presidency featured a tightening Fed and losses in Treasuries.
“Bulls could argue that this year’s market difficulties represent a similar adjustment to sharply higher rates across the curve, and that higher prices are in store when those rates have been fully absorbed,” said Doug Ramsey, chief investment officer of Leuthold. “Our view is less optimistic.
Right now, it’s far from easy sleep. More than one fifth of S&P 500 members are in bear market-like declines of 20 percent or more. Nine of the 11 major industries have, at one point or another, suffered bigger losses than the broader gauge.
“Is it possible that we’re experiencing a rolling bear market? We think the answer is yes,” said Mike Wilson, chief U.S. equity strategist at Morgan Stanley. “This year has been so difficult to navigate with the exception of technology’s unabated leadership.”
It’s testing the patience of investors who are already reluctant to pay up for earnings. Sure, analysts forecast profits will increase by more than 10 percent in each of the next two years. But the question is, what’s the fair multiple for earnings now that the safety net from the Fed seems to be gone?
“Our fear is the Fed is going too far and more pain lies ahead,” said Jim Bianco, founder of Bianco Research LLC. “If this was a ‘standard’ bull market correction, the market should have recovered to a new high by now. The longer it goes without recovering, the more it starts looking like the first leg down in a larger correction.”
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