By Remember Muzak? The company that produced unobtrusive music played in the background of elevators, airplanes, malls, and offices? The best stock markets are often just like that – they quietly thrive without making a fuss.
Currently, we find ourselves in such a market. The S&P 500 has experienced minimal movement, not exceeding 1%, for the past 16 days. This is the longest stretch of limited volatility since the 21-day streak that ended on Aug. 1. Surprisingly, this lack of excitement has been beneficial for investors.
During this period, the index has managed to gain 1.8%. It may not be extraordinary, but it certainly isn’t too shabby either. Reflecting this calmness, the Cboe Volatility Index (VIX) sits below 13, indicating a reluctance among investors to pay for protection.
Nathan Kotler, head of trading at GenTrust, attributes some of this complacency to the recent drop in interest rates and the decline in the MOVE index (the bond market’s equivalent of the VIX). However, Kotler warns that this tranquility may lead to imprudent behavior if investors forget about the risks inherent in the market. He cautions, “Even a slight change in macroeconomic expectations could send the VIX higher.”
On the other hand, Que Nguyen, chief investment officer for equity strategies at Research Affiliates, proposes that the market is currently influenced by three factors: valuations, earnings, and sentiment. Unfortunately, these three elements are as uninteresting as the market itself.
In conclusion, while the current stock market may not be making headlines or creating an atmosphere of excitement, it quietly continues to generate positive results. Though caution is advised, investors can find solace in its steady performance.
Equity Valuation and Earnings Outlook
When it comes to assessing equity valuation, the S&P 500’s metrics tell an interesting story. As of November 15th, the index was trading at 19.7 times forward earnings, which may seem high at first glance. However, this valuation is actually right around the average for the past seven years. Moreover, other measures, such as the S&P 500’s earnings yield, show a similar trend.
According to expert analysis, equities cannot be considered cheap. However, they also do not appear to be overvalued. This conclusion suggests that there is a balanced outlook in terms of equity valuation.
The stability of earnings is another promising aspect to consider. Although not necessarily spectacular, third-quarter earnings reports have been described as “stable.” More importantly, earnings growth has finally made a comeback. Analysts anticipate growth of 10% to 12% in 2024. While some express concerns that this forecast may be too optimistic, historical data shows that companies tend to outperform these expectations.
Sentiment among investors is often a focal point of market analysis as well. Many look to surveys conducted by the American Association of Individual Investors (AAII) for insights. Although the AAII sentiment survey shows a significant percentage of respondents as bullish, a more reliable indicator is the allocation of cash in investors’ portfolios. In November, investors had allocated 19% of their portfolios to cash, surpassing the 10-year average of approximately 17%. This suggests that equities are currently experiencing a period of stability, despite what may seem like overhyped sentiment.
Overall, equity fundamentals are moving through a phase of relative boredom, as characterized by expert analysis. While this may disappoint media outlets seeking exciting narratives, such periods can actually be advantageous for equity investors.
Historical Perspective
Historical data provides further support to Nguyen’s assessment. Over the past decade, there have been 30 instances of streaks lasting 15 days or more without a 1% market move. Remarkably, in 70% of these cases, the market was higher three months after the streak ended. On average, investors gained 1.5% during these post-streak periods.
However, it is worth noting that the longest streaks have been associated with significant declines. When streaks of 60 days or more came to an end, the S&P 500 experienced an average decline of 9.3%. Throughout the past ten years, this scenario occurred four times.
In conclusion, while a period of relative boredom may prevail in the equity market, it should not be seen as a negative phenomenon. As history suggests, such periods can provide favorable opportunities for investors. However, caution is warranted when dealing with extremely long streaks, as they have been followed by substantial downturns.
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