Complacent Markets Will Reach a Breaking Point Eventually

The stock market will break out of its current state of inertia eventually -- the question is which way. One investment adviser isn't so sure it's time to sell. 

Markets have been unusually calm as of late. The S&P 500 only has moved more than one percentage point in either direction once in the past month, and volatility has remained curiously low.

But just because things are quiet now doesn't mean they'll stay that way forever, warned Seth Masters, chief investment officer at Bernstein Global Wealth Management.

"When you're stuck in one of these moments of stasis, you know you're going to break out somehow on one side or the other," Bernstein said while speaking at the Common Good Forum in Midtown Manhattan on Friday.

The U.S. economy began to reaccelerate last summer, and financial markets are already reflecting anticipated good news to come. The S&P 500 has climbed about 15% over the past year, and earnings are expected to grow 10% this year and next.

"If current expectations hold true, what's really going on is that the market today is basically pricing in what it believes will happen over the next two years," Bernstein said.

Investors have also been drawn into a lull by the fact that events one would expect to cause big swings -- geopolitical uncertainties in Syria and North Korea, surprise moves out of Washington -- have not.

"The information flowing through hasn't had major impacts over the past several years, so why overreact to the next piece of information?" Ed Cissold, chief U.S. strategist at Ned Davis Research Group, said in a recent interview with TheStreet.

Wall Street is looking for signals on tax reform, infrastructure spending and deregulation, measures promised by the Trump administration that would boost markets. It is also on the lookout for setbacks, such as failed health care reform and legislative delays.

Most of the factors that have precipitated market peaks historically are not present right now, Masters said -- oil price spikes, long-term yield increases, manufacturing slowdowns, expensive price-to-earnings valuations, a rise in global policy rates. But some are -- namely, Federal Reserve rate hikes, consumer euphoria and, to a certain extent, international crises.

"Nothing yet has gotten that bad," he said. 

While investors may be inclined to sell and hang back, Masters said they could be missing out on a vital opportunity.

Going back to 1988, the average three-year return for U.S. stocks is 10.6%. If investors miss the best five days, that return shrinks to 3.7%. And if they miss the nine best days, it's negative.

In other words, timing the market means getting out and getting back in, so perhaps don't sell in May and go away.

Editors' pick: Originally published May 12.

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