There have been two big surprises for me this year.
One has been the phenomenal price rise of bitcoin.
The other is watching the unstoppable US market.
The Dow Jones is up almost 25% this year. After last night’s trading session, it’s 270 points shy of pushing through 25,000 points.
In fact, I reckon with a little help from Santa, there’s a chance the Dow could smash through that in the next two trading sessions. After all, a 270-point rally only represents a 1% gain.
Already the Dow has reached five 1,000-point milestones this year. Something it has never done before. If this 121-year-old index does crack the 25,000-point mark in the next six days, that will make it the sixth milestone — a new record in a year full of records.
The momentum carrying the 30 giant US stocks making up the Dow is nothing short of incredible.
Perhaps what is most remarkable is the Dow’s complete absence of volatility this year. I thought this lack of volatility was confined to this year. However, Morgan Stanley says the Dow’s lack of volatility could be part of a decade-long trend. Take a look:
Dow Jones volatility annualised by decade
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As you can see, volatility in this current decade is very low. However, it’s still not as low as it was during the 1950s and 1960s.
Even though the US market is at history-making highs, volatility is declining. The reason why volatility is important is because it gives the market an indication of how risky things are.
The higher the volatility, the riskier the market. This is reflected in the VIX [CBOE Volatility Index]. Looking at the VIX chart, the reading is practically at the lowest level ever.
VIX historical average
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Overnight, the VIX was trading at 10.03%. This is less than half of its long-term average of 20%.
Morgan Stanley notes that this low volatility is ‘…reflective of the fundamentals driving volatility rather than investor complacency.’
It’s a similar story with the S&P 500. The S&P 500 isn’t in the spotlight anywhere near as much as the Dow. Yet this broad measure of the US economy is up a whopping 19% for the year. Like the Dow, there’s a complete lack of volatility in this S&P 500 as well.
Realised volatility for S&P 500 — 1990-present
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Despite a year of headline-making geopolitical events, the US market has failed to react to uncertainty. No matter what the news, the market manages to shake it off. Investors have taken any fall as a way to ‘buy the dip’. Even the smallest fall has encouraged more punters into the market.
Both the Dow Jones and the much broader S&P 500 index haven’t fallen more than 3% in one trading session this year so far.
To boot, it’s the first time since the inception of the Dow that the US market hasn’t crashed in a year ending in the number seven. Sure, there are still six trading days left. But the odds of a market crash now look slim to none.
No news is good news, bad news is good news, and any fall is a reason to buy more. To be frank, it’s not normal market behaviour.
It’s enough to wake all the market bears from their slumber.
But there is a historical precedent here.
As mentioned above, this level of low volatility was last seen in the 1950s and 1960s, and even for the most of the 1990s.
This lull in volatility tells us something important: That a major market crash is perhaps further away than many think. It confirms that the market isn’t worried about the current political climate. Or even the daily news coverage of a potential conflict between the US and North Korea.
Without an increase in volatility, there’s no immediate danger of the US market crashing. All the current information appears to be washing over investors.
If anything, chances are the US market could be readying for an even bigger surge in the first of half next year.
Yet there is a sector of the market that could potentially soar regardless of how the US market fares. One that could become a safe-haven for investors should market turmoil strike. Details here.
Editor, Markets & Money