A More Volatile Bull?

The past few weeks have been a wild ride in the stock market. Between 1/26 and 2/8, the S&P 500 fell a little over 10%. In many ways a correction of this size is very normal. What isn’t normal, is the level of calmness in the market that preceded this correction. The market had been on a tear and had gone 400 days since the last 5% correction, nearly setting a record for the longest such streak ever. In fact, you would have to go back to 1959 to witness a longer streak.

Investment Advisor Hilton Head

As we alluded to in our email last week, it appears the volatility was exacerbated by some poorly placed bets on questionable derivative volatility products (VIX, XIV, TVIX, etc). Whether you look at “portfolio insurance” in 1987 or the yen carry trade in 2007, these types of products and bets have a history of causing increased volatility that has a way of rippling through even tangentially related markets. As Warren Buffet has said, “…you only find out who is swimming naked when the tide goes out.”

History tells us we should expect a 5% correction more than 3 times per year, and a 10% correction more than once per year. The volatility of the last two weeks is nothing new. The good news is that although history tells us our current situation (an extended rally prior to the correction) typically results in a slightly longer correction, the returns over the next 6 to 12 months have historically been stronger than corrections not preceded by extended rallies.

We have very likely moved away from the low volatility environment that typified 2017, but history suggests the overall bull market may yet have legs.