Like Muzak in an elevator, the best stock markets are those you don’t notice—and this is starting to look like a great stock market.
A Familiar Tune
Do you remember Muzak? It was the company known for producing wordless tracks that played innocuously in the background. The more unobtrusive, the better. It was literally music for elevators—and airplanes, malls, and offices. Best heard, but not listened to.
The Subtle Success
The best stock markets often follow a similar pattern. They don’t wow investors with eye-popping gains or terrifying declines. They’re not the talk of barbershops or taxicabs. It’s like watching paint dry, until you realize how good the room looks.
And that’s the kind of market we have right now. The S&P 500 has experienced minimal movement, less than 1% in either direction, over the past 16 days. This is the longest period of limited volatility since the streak that concluded on Aug. 1. And surprisingly, the boredom hasn’t been bad for investors.
During this streak, the index has gained a respectable 1.8%—nothing extraordinary, but certainly not too shabby either. The Cboe Volatility Index (VIX), which measures future expectations for volatility, is resting below 13. This calmness has made investors hesitant to pay for protection.
Factors at Play
Nathan Kotler, head of trading at GenTrust, attributes some of this calmness to the recent drop in interest rates. He also points to the decline in the MOVE index, the bond market’s version of the VIX. However, Kotler warns that investors may have become overly complacent. With the VIX hovering around 12, even a slight change in macroeconomic expectations could send it soaring.
On the other hand, Que Nguyen, chief investment officer for equity strategies at Research Affiliates, argues that the market is driven by three factors: valuations, earnings, and sentiment. And right now, they are as boring as the market itself.
In conclusion, while some may find this uneventful stock market dull, others see it as an opportunity to appreciate the beauty of stability and minimal volatility. Whether caution is warranted or not remains to be seen, but for now, investors can enjoy the quiet symphony of the market.
Equity Valuation and Earnings Growth: A Balanced Perspective
The current valuation of the S&P 500 index has raised concerns among investors. As of Nov. 15, the S&P 500 was trading at 19.7 times forward earnings, which may seem relatively high. However, when compared to the average valuation over the past seven years, it is actually quite consistent. Other measures, such as the earnings yield, also support this view. In light of these findings, it is challenging to argue that equities are cheap, but they also do not appear to be overvalued, according to Nguyen.
Earnings have shown stability, if not remarkable growth. Third-quarter earnings reports were described as “stable” by Nguyen, who pointed out that earnings growth has finally made a comeback. Analysts expect a growth rate of 10% to 12% in 2024, although there are concerns that this number might be too optimistic. However, it is worth noting that companies tend to surpass these forecasts more often than not.
Sentiment in the market is not as extreme as it may seem at first glance. Rather than relying solely on the sentiment survey conducted by the American Association of Individual Investors (AAII), which shows a higher percentage of bullish respondents compared to bearish ones, Nguyen prefers looking at the amount of cash allocated in the AAII’s allocation survey. In November, investors had 19% of their portfolios in cash, exceeding the 10-year average of approximately 17%. This implies that equity fundamentals are currently experiencing a prolonged period of stability and predictability, which is generally favorable for equity investors.
Historical data supports this assessment. Over the past 10 years, there have been 30 streaks of 15 consecutive days or more without a 1% move in the market. Interestingly, three months after these streaks ended, the market was higher 70% of the time, with an average gain of 1.5%. However, there is an important caveat to consider. The longest streaks, specifically those lasting 60 days or more, were followed by significant market declines. On average, the S&P 500 dropped by 9.3% during these periods, which occurred four times within the past decade.
In conclusion, while some may consider the current market conditions as “boring,” they actually present an opportunity for equity investors. The balanced perspective provided by Nguyen suggests that the market is neither excessively bullish nor overvalued. Earnings growth remains stable, and although caution is advised regarding overly optimistic forecasts, history provides valuable insights into the potential for future market movements.
