Marble Trail Financial is a joint venture of Addison Advisors LLC dba Marble Trail Advisors, Davis Associates,  and Misasi & Company LLC. Investment advisory services are provided by Marble Trail Advisors, a registered investment adviser, and tax preparation and accounting services are provided by Davis Associates and Misasi & Company LLC.

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“Eerie Calm” Persists as Stocks Climb to New Records

July 6, 2017

 

Continuing the climb we analyzed in our last quarterly report, the Dow Jones Industrial average and S&P 500 each rose 3% in a second quarter that was notable mostly for its lack of volatility. There were provocative headlines, to be sure, including the dropping of the “Mother of All Bombs” on ISIS and the allegation by former FBI Director James Comey that he was asked by the President to drop his investigation of Michael Flynn. Just last week, North Korea successfully tested an intercontinental ballistic missile apparently capable of reaching Alaska and Hawaii. Each time, the market wobbled, and then quickly recovered. By historical standards, the wobbles were both small and rare. Last quarter there were only three days (highlighted in chart) in which the Dow traded up or down more than 1%, and two of those were successive days of gains following Emmanuel Macron’s victory in the first round of France’s presidential election. Since 2010, a typical quarter has had 13 days with gains or losses greater than 1%; there have been no such days in nearly two months. This figure and every other measure of volatility have been trending down since last year’s US presidential election.

 

Let’s be honest; no one saw this coming. Few people predicted Donald Trump would be our President. Fewer still foresaw that the stock market would immediately soar on his election. And no one believed that stock market volatility would decline with the election of a president with few detailed or consistent economic positions and a propensity to tweet outrageous (to many) comments. We often remind readers that no one can reliably predict the short-term movements of the stock market. Here’s more proof. 

 

As we acknowledge that we too did not see this coming, we feel compelled, humbly, to offer an explanation for why it’s happening. The same factors we cited last quarter are still at play: investors widely expect the enactment of corporate tax cuts in the U.S., economic conditions in Europe and China continue to exceed previous expectations, and interest rates remain near historic lows. However, while fundamentals are surely key to recent market performance, investor sentiment may be more significant. When the market performs this strongly with so little volatility, it’s understandable if investors become complacent; problematically, when investors gain confidence, they also increase risk-taking. We’ve seen evidence of this in the resurgence of tech stocks, which have out-gained the rest of the market by more than 10% this year. When complacency and risk-taking rise, markets become more vulnerable to large shocks – events with the capacity to upend sentiment and destroy confidence, but which are by definition unpredictable. Such shocks could come from events in North Korea, or Europe, or right here at home. While we cannot predict short-term market fluctuations, we can foresee that each bull market will eventually end, this one included. At what may well be the apogee of this particular cycle, now is a critical time to prepare mentally and financially for greater turbulence than we’ve experienced recently.

 

 

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