Rocky Start for Stock Traders Still Getting Accustomed to Normal

(Bloomberg) -- A new year is starting like the old one ended, with garden-variety volatility that somehow feels worse than it is. Getting used to the swings is a process that investors expect to continue as 2019 wears on.

Wednesday’s 69-point swing in S&P 500 futures extends a stretch in which the contract has traded in a range greater than 1 percent for 17 straight days. But it also follows a year when equity turbulence, as measured by daily values in the Cboe Volatility Index, was considerably less than average.

So why has it all felt so harrowing? Because of how abnormally calm things were in the past.

“Trading desks are full of people who have yet to experience a period of prolonged volatility in their career,” Kevin McPartland, managing director at Greenwich Associates, said in an interview. “It seems likely they’re going to get that experience in 2019.”

The VIX averaged 16.6 over the 250 trading days of 2018, the 12th-lowest reading since 1993. But compare the number with 2017’s average of 11.1, and the difference -- the rate at which swings widened -- starts to get historical.

Rocky Start for Stock Traders Still Getting Accustomed to Normal

Over the last 12 months, weekly swings in the S&P 500 averaged 1.88 percent per calendar week, almost three times the previous year’s average change. The ratio between the two is larger than any other single-year increase since at least 1929, data compiled by Bloomberg show.

“It felt like a much more erratic market because, A, it was, and, B, we were lulled to sleep by last year’s lack of volatility,” said Rick Bensignor, president and founder of the Bensignor Group and a former Morgan Stanley strategist. “Emotions are running high right now, and last year emotions were asleep.”

As much as anything, the violence of the awakening explains the challenges that have cropped up in another high-profile process of normalization: Federal Reserve Chairman Jerome Powell’s withdrawal of stimulus from the U.S. economy. Four rate hikes in 2018 have bred an unremarkable level of turbulence in stocks -- and Powell is accused in some quarters of a giant policy blunder.

It’s the mirror image of 2017 and much of the bull market, when Fed policy-makers were sometimes blamed for engineering a market advance of astonishing calm. One thing’s for sure, it left investor nerves unprepared for the roller-coaster ride in 2018, which featured two separate S&P 500 corrections.

Rocky Start for Stock Traders Still Getting Accustomed to Normal

“We’re back to normal volatility,” John Spallanzani, portfolio manager at Miller Value Partners, said in a phone interview. “Many people in the market have not been around that long,” he said. “All they know is a low rate environment and a low volatility environment, and that’s not the norm. For a healthy market you need both. Few are used to or have experienced a tightening cycle. And even fewer from a level of negative interest rates.”

Not that bulls didn’t take their lumps. Down 6.5 percent, 2018 was the S&P 500’s first noticeably down year of the bull market, with fewer than 170 of its constituents posting gains. The index posted five single-day drops of more than 3 percent, more than in the last three years combined.

The S&P 500’s price-to-earnings ratio fell 5.3 points last year to 17, data compiled by Bloomberg show. Larger full-year declines in P/Es have occurred only two times since the data started being collected in 1954, and there were bear markets during both: 1973 and 2002.

Rocky Start for Stock Traders Still Getting Accustomed to Normal

“There will be a lot more volatility,” said Dave Campbell, a principal at BOS, a San Francisco-based wealth management firm with around $4.2 billion in assets under management. “We’ve been reminding clients that the lack of volatility that we saw the prior three years was abnormally low. People didn’t notice it was abnormally low. We’re getting back to normal market volatility with some big gyrations.”

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