Wild Week Was Just Like All the Others in a Near-Record Bull Run
(Bloomberg) -- Your nerves are lying.
Don’t believe them when they say the past week in U.S. stocks was crazy. Or volatile. Or in any way unusual, when laid side by side with all the others in a bull market that by some definitions is about to become the longest ever.
Stocks bounced around on alternating days, the VIX had two 10 percent spikes, and high-priced tech stocks lurched. By now, investors should be used to it.
Start-to-finish, the S&P 500 Index gained 0.59 percent, just a bit above its average weekly return of 0.31 percent since March 2009. The VIX hovered around 13, pretty calm compared with the mean of 18 since the rally began. Equities are expensive -- 20.7 times annual earnings versus the nine-year average of 17.8. But they were at 23.3 as recently as January.
Ignore the noise, the pros always say. For 3,448 days, it’s been the key to making money amid an advance that has paid a total return of 414 percent since the depths of the financial crisis. Yes: the advice will one day prove wrong. But nothing that happened this week was unusual enough to suggest it’s wrong now.
“It’s a tug of war between headlines and strong underlying fundamentals,” said Joseph Tanious, a senior investment strategist at Bessemer Trust in Los Angeles, which oversees more than $100 billion. “The end result, the market moving higher with more volatility.”
It all sounded scary in real time. Stocks in developing countries sank toward a bear market. But bigger declines erupted twice before in this bull market, and neither killed the rally. And unlike in February and March, when tech selloffs spelled trouble for the broad market, the FANG complex of internet megacaps suffered its worst week in five months while the S&P 500 stood firm, closing less than 1 percent away from its all-time high.
Credit the resilience to an economy that expanded at the fastest pace in four years and two consecutive quarters of 24 percent earnings growth. Also helping are persistently low interest rates, in place over the past decade thanks to the Federal Reserve.
The yield on 10-year Treasury notes fell for a third week, helping solidify the leadership of dividend stocks such as utilities when cyclical shares like energy and tech were under fire.
Not everyone is sanguine. Suzanne Hutchins, a senior portfolio manager at Newton Investment Management in London, says it’s dangerous to treat the selloff in emerging countries as noise. Along with the VIX’s explosion in February, she says, frequent market turbulence reflects the fragility of the financial system as more central banks are set to join the Fed in withdrawing stimulus.
“We’re on a very different rate trajectory and a very different liquidity backdrop,” said Hutchins, manager of the $1.5 billion Dreyfus Global Real Return Fund. “Risk is very elevated right now,” she said. “The S&P 500 will be vulnerable this time.”
Investor uneasiness was on display as the market rose and fell to tune of daily news flows.
Concern over Turkish contagion sent the S&P 500 to the longest slide since March in the four days through Monday before the market bounced back the next day. Stocks got hit again Wednesday when a surprise profit drop at Chinese internet giant Tencent weighed on tech stocks. Sentiment lightened up after Walmart’s results and a planned resumption of China-U.S. trade talks.
Safety is at a premium -- a turnaround from earlier this year, when faster growth was sought in chipmakers and Internet companies. Over the past three months, money has been flowing to industries less sensitive to economic swings, such as utilities and soap producers.
The appetite for risk has diminished. Leverage among money managers, or the amount of money borrowed to buy and sell stocks, has declined to the lowest level this year, data compiled by Morgan Stanley on its hedge fund clients showed.
The lack of enthusiasm may be why the S&P 500 has failed to surpass its January peak. But anyone who has studied equity cycles would have learned that fear, a key signature characteristic of this bull market, is one reason why the advance has come this far.
A pullback is likely to be another dip worth buying, according to John Stoltzfus, chief investment strategist at Oppenheimer Asset Management.
“So long as economic and corporate fundamentals stateside continue strong, and prospects for trade dispute resolutions remain an option, episodes of increased volatility that might lie ahead of us could well prove in hindsight to have been opportunities to seek babies that get thrown out with the bath water,” he said.
©2018 Bloomberg L.P.