S&P Volatility Falls Most Since FDR as Valuations Sink
Daily price changes in the Standard & Poor’s 500 Index are decreasing the most in eight decades, shrinking to the smallest since 1995 when investors abandoned stocks just before the biggest rally ever.
The benchmark gauge for U.S. equities has gained or lost an average 0.46 percent a day this year, compared with 1.04 percent in 2011, the biggest reduction since 1934, during the Great Depression, according to data compiled by Bloomberg. Swings are diminishing after valuations fell 40 percent and correlation among shares weakened the most in at least three decades.
At the same time, trading on the New York Stock Exchange has slumped to the lowest rate in 13 years, spurring concern about the biggest first-quarter rally since 1998. Bulls say the decline in trading and daily swings signal fear is dissipating after one of the most volatile years on record. Bears say falling volume is a warning gains will reverse should economic reports and earnings fail to match expectations.
“Low volatility is good in that it will bring investors back,” Tim Hoyle, the director of research at Radnor, Pennsylvania-based Haverford Trust Co., which manages $6 billion, said in a March 13 phone interview. “Even though bullish sentiment is high, people are still fearful. I see it in my business every day, they couldn’t stomach the volatility. This will restore some sense.”
Equities rallied last week, with the S&P 500 (SPX) gaining 2.4 percent to 1,404.17, and the Dow Jones Industrial Average (INDU) reaching the highest level since 2007 even as trading slid to a 2012 low on March 12. Gains were fueled by the biggest retail sales increase in five months and an improved economic assessment by the Federal Reserve. The S&P 500 advanced 0.4 percent to 1,409.75 today.
The index has gained 28 percent since reaching a one-year low in October amid signs the Fed’s zero-interest rate policy is spurring growth and a ninth straight quarter of earnings growth. The rally curbed recession concerns that sent the index down almost 20 percent between April and October last year. Companies from Clorox Co. (CLX) to Goodrich Corp. (GR) are advancing even as the size of daily moves (VIX) decreases.
Efforts by European leaders to contain their debt crisis are sparing investors last year’s trauma. The S&P 500 has declined more than 1 percent once this year, when it fell 1.5 percent on March 6. That’s the fewest times to start a year since 1995 and compares with an average of 12 such drops in each quarter of 2011, data compiled by Bloomberg show. Moves have decreased the most 78 years, when they shrunk to 1.23 percent from 2.23 percent.
The S&P 500’s price-earnings ratio has dropped to 14.6 from 24.2 in December 2009, mirroring its retreat to 16 from 26.5 in the 32 months ended in January 1995. Stocks soared that year, with the index gaining 34 percent for an annual return unmatched in the last half century.
The potential for surprise now is similar to 1995, when the yield on 30-year U.S. Treasuries fell 1.93 percentage points even as Wall Street predicted it would rise, according to a March 1 note from Laszlo Birinyi, president of Westport, Connecticut-based Birinyi Associates.
“We are not insisting on a repeat but believe that investors should consider the possibility,” wrote Birinyi, among the first to advise buying stocks in March 2009, just as the S&P 500 began a rally that doubled the index’s market value. “In 1995 the consensus trade was higher yields, today it is tepid economic growth and the market is suggesting, perhaps insisting, an alternative to that consensus.”
The degree to which stocks move in tandem has diminished, giving investors more opportunity to make money based on earnings and corporate actions, according to ING Investment Management’s Paul Zemsky. The so-called correlation coefficient for S&P 500 members fell 44 percent to 0.43 on March 5, the biggest retreat for any two-month period since at least 1980, according to the 50-day rolling average of Birinyi data. A coefficient of 1 means all 500 stocks move together.
“The downtrends in all those indicators reflect the other side of the panic that drove forced liquidations last summer,” Kevin Caron, a market strategist in Florham Park, New Jersey, at Stifel Nicolaus & Co., which has more than $119 billion in client assets, wrote in a March 14 e-mail. “As cooler heads now prevail, markets are again more discriminate and rational which means hedging activity subsides, forced sales abate, and good stock picking becomes a critical skill.”
Speculators closing bearish trades by buying back stock they borrowed and sold may be adding to gains. New York Stock Exchange short interest as a percentage of total shares outstanding has fallen every month since September, to 3.29 percent in February, the lowest level since March 2011. Before that, short interest was last this low in October 2007, the data show.
Some investors view rising short interest as bullish. It reached a two-year high on the NYSE in September, just before the S&P 500 began a five-month rally that restored more than $3 trillion to equity values. Its peak before that came in March 2009, when the index began an advance in which it has risen 108 percent.
Becalmed markets are doing little to lure investors. An average of 768.44 million shares a day changed hands on the NYSE in the 50 days through March 5, the least since 1999, data show. Volume on all U.S. exchanges fell to 5.23 billion on March 12, the lowest daily level of 2012 and the smallest total excluding holiday weeks since Bloomberg data began in 2008.
Trading by individuals has been slowing since the 2008 financial crisis. Daily average volume slipped 9 percent last quarter compared with a year ago, according to data from New York-based E*Trade Financial Corp. (ETFC), TD Ameritrade Holding Corp., in Omaha, Nebraska, and Charles Schwab Corp., based in San Francisco. At E*Trade, the fourth-largest retail brokerage by client assets, daily trading volume is 35 percent below its level at the end of 2008. Revenue-generating trades are down 14 percent in the same period at Schwab.
“For the markets to move higher, we’re going to need to have money come into the market,” Chris Sheldon, who helps oversee $400 billion as chief investment officer at Dreyfus Corp. in New York, said in a Bloomberg Television interview March 14. “Right now the volumes are quite low, and that tells me that there’s still some skepticism.”
Wall Street strategists are more bearish now than they’ve been at this point in any year since at least 2006, data compiled by Bloomberg show. The S&P 500 will end 2012 at 1,357, 3.4 percent below last week’s closing price, according to the average of the 11 firms surveyed by Bloomberg. The S&P 500 has outpaced strategists three other times since data started in 2006.
Although the economy avoided a recession last year, forecasts for first-quarter expansion at 2 percent are less than the 3 percent growth in the last three months of 2011, the Institute for Supply Management’s index of U.S. factory activity is below the high reached in 2011 and analysts revised 2012 earnings projections down 0.9 percent since the start of the year. The data signal the economy isn’t growing fast enough to justify the gain in stocks during the past five months, according to Scott Migliori at RCM in San Francisco.
“The market has gone too far, too fast relative to the economic data,” Migliori, the chief investment officer for the U.S. at RCM, which has about $128 billion under management, said in a March 14 phone interview. “I’m in the camp that the market probably starts to struggle.”
Sentiment among individual investors is a reason to buy stocks now, said Stewart Capital Advisors’ Malcolm Polley. Net outflows of funds that invest in U.S. equities totaled $2.13 billion in January, after $135 billion in 2011, the worst year since 2008, according to the Investment Company Institute in Washington. The data show investors have money to spend once they regain confidence, he said.
“Individual investors are always the last ones to the party,” Polley, who oversees $1.1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania, said in a March 13 phone interview. “The average person on the street doesn’t want to own stocks, they’re tired of making no money for a decade. That blows my mind. For me, I like that because it means things are relatively inexpensive.”
Clorox, in Oakland, California, has a price-earnings ratio about 25 percent below its average since 1990. The stock rose 1.9 percent this year, even with daily gains or losses of 0.55 percent, down from 1.03 percent last year. The advance in the past 2 1/2 months is already almost half last year’s 5.2 percent advance.
Ecolab Inc. (ECL), the largest maker of cleaning chemicals for hotels and restaurants, jumped 4.2 percent this year, on track for the best first quarter since 2006. Volatility in the stock is about half what it was last year, with daily moves of 0.52 percent, compared to 1.2 percent in 2011.
Goodrich has risen or fallen an average 0.1 percent so far in 2012, the lowest of any S&P 500 company. That’s down from 1.14 percent in 2011, more than the S&P 500’s average. The Charlotte, North Carolina-based aerospace equipment maker is up 1.8 percent in 2012, compared with a loss of 4.7 percent at the same point last year, data compiled by Bloomberg show.
“When volatility and correlation go down like this it’s a sign that people are generally more content with their positions and are more sanguine about the market,” Zemsky, the New York- based head of asset allocation for ING, said in a March 15 telephone interview. His firm oversees $160 billion.
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