Commentary by Joe Clark
In 2009, Barron’s published an article titled, “The easy money has been made.” That article was followed up in 2010 by an identical headline in Morningstar. Marketwatch repurchased the title in 2011 as did The Street in 2012 and Morningstar again in 2013 before Barron’s used it in 2014!
Along the way, the market reached new highs with below normal volatility. The S&P 500 is currently on a 74-month streak without a 10 percent correction. The average length of a bull market is 54months.
Today’s markets are what we call “long in the tooth.” There has been a recent change in leadership from the smaller companies in the S&P 500 to the larger companies. Typically this trend signifies that investors’ risk appetites are waning. That doesn’t mean the end of the world or another 2008 Armageddon but does imply we should expect more volatility.
Another noticeable change is that foreign markets are outpacing the U.S. market for the first time in more than three years. We must be alert to clues and consider the broad evidence before making investment decisions.
Complacency is the art of being satisfied and without worry. Summing up the feelings of many equity savers today, “complacent” is an apt description. Over the last three years, the market has seen very little volatility while continuing to rise in value. This relationship of reduced market volatility compared to market performance in a three-year period is at the highest correlation since 1900! Essentially, this analysis tells us that if volatility stays at bay, the markets will tread higher. The obvious concern should be what happens if volatility returns – quickly?
Humans are creatures of expectations. They expect bonds to be less volatile than stocks because that is what they have been told, but such conventional wisdom has recently proven untrue. Investors expect the market to behave as it has in the recent past – straight up with limited volatility. But an average market year has a correction from peak to trough of more than 10 percent! Now is no time for complacency. Risk may be resting, but it is out there.
