Unlike Total Eclipses, Volatility Doesn't Operate on a Schedule

A major feature of financial markets thus far in 2017 has been stocks' uncharacteristic calm -- popular measures of volatility like the VIX have remained low, most-days-without-a-big-drop records have been tested, and the media has waxed fearful about the dangers of complacency. Here's a slice:

"The past 30 days have been the least volatile of any 30-day period in more than two decades. Only five days during the most recent stretch saw the S&P 500 move by more than 0.5% in either direction, the lowest since the fall of 1995. ... The quiet market, measured by the realized volatility -- a measure of how much share prices move around -- of the S&P 500, has led some to worry that a market storm may be brewing, as peaceful periods in the past have frequently ended in sharp corrections."

So said a Wall Street Journal article published ... wait for it -- 363 days ago. Since then, the S&P 500 has gained 13.2%, with low volatility persisting and no "market storm" or "sharp correction."[i] But that hasn't swayed the Calm-Before-the-Storm crowd from its Chicken Little mentality:

"The S&P 500 hasn't suffered a downturn of 5% or more since June 26, 2016. That's 402 calendar days -- the longest streak since May 1996, according to Bespoke Investment Group. ... The lack of market craziness is a relief to many Americans, but some are wondering whether Wall Street is due for a drop. They worry that the market has become a little too quiet -- especially considering the relentless noise from Washington and global hot spots like North Korea."

That snippet comes from CNN on Aug. 3. The fine folks at MarketWatch were only slightly more upbeat a week later: "The S&P hasn't had a daily move of at least 0.5% in 13 sessions, an abnormally long time. That is a sign that while investors aren't broadly seeing the kind of risk that could lead to a correction, they're also finding few reasons to keep pushing shares meaningfully higher from current levels."

Folks, these are the same worries that dominated headlines a year ago -- and nothing has changed but the passage of time. Stocks are still stocks. Past performance still isn't predictive. Volatility still isn't predictive. Corrections and pullbacks still don't operate on schedules. Nothing about the relatively calm year tells us what comes next. Nor do the S&P 500's twin 1.5-ish percent drops the past two Thursdays, which somehow didn't break the low-volatility narrative.

Corrections -- sharp, sudden, sentiment-driven drops of around 10% or worse -- happen for any or no reason. They come without warning, at seemingly random intervals. Since this bull market began in March 2009, we've had six: two in 2010, two in 2011, one in 2012 and one in 2015-2016.[ii]

The most recent ended Feb. 11, 2016. Eighteen months later, we are not any more "due" for one than we are "not due" for one. Just as there is no law saying David Lynch must tie up loose ends when Twin Peaks: The Return wraps in two weeks, there is no law saying markets must revert to the mean. Corrections are not eclipses. You cannot time them.

Heck, we could already be in one. Through Friday's close, the S&P 500 was down 2.1% from its most recent high, notched Aug. 2.[iii] But what if you sold now, anticipating another 8% drop or worse, and instead we got a rally? That's the trouble with corrections being so random. Trying to avoid them opens you to new risks. If you ride a correction down and back up, you still have market-like returns -- the ticket to most long-term investors' goals. If you sit out while stocks rise 10%, 20%, 30%, you have ground to make up. In our view, this makes staying put the wisest move.

Unless, that is, a bear market is forming. Unlike corrections, bear markets are identifiable, making them possible for investors to partially evade. For one, they are longer and deeper, giving you more time to assess the fundamental landscape and consider your options.

Bear markets usually fall about 20% or worse, so if you determine after a decline of 10% or so that you're in one, getting out can still add value. They also result from visible, fundamental negatives. Sometimes, euphoric investors overlook deteriorating economic drivers. Other times, a huge, largely overlooked negative wipes out trillions in economic activity and wallops the market.

None of this makes bear markets foreseeable, so getting out at the precise peak is an unrealistic goal. But if you can identify one in its opening months, you can probably get out while more downside is ahead of you than behind you, as bear markets' most brutal declines typically happen in the final third or so.

While no one can know if we're in a correction, we don't believe a bear market is dawning. Investors are nowhere near euphoric. Some fear complacency, but that would still involve investors overlooking a weakening economic landscape or big regulatory risk.

Neither appears to be the case today. The global economy is growing, corporate earnings are rising, and Leading Economic Indexes suggest more fun lies in store. Politics are full of drama, but that drama brings gridlock, which reduces legislative risk -- fodder for bull markets. We're always watchful for wallops, but none of today's potential negatives appear big, likely or underappreciated enough to knock this bull market off course. They just seem like bricks in the wall of worry bull markets climb.

So stay cool and don't overthink short-term wiggles (or a lack thereof). They're all part of stocks' jagged march higher, as stocks eclipse prior highs. Sorry.

[i] Source: FactSet, as of 8/21/2017. S&P 500 Total Return Index, 8/23/2016 - 8/18/2017.

[ii] If you want to call the last one two corrections, we'll give it to you. Defining this stuff is all more art than science.

[iii] Source: FactSet, as of 8/21/2017. S&P 500 Total Return Index, 8/2/2017 - 8/18/2017.

Fisher Investments is an independent, fee-only investment adviser serving investors globally. To learn more about Fisher Investments, please visit

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