2017's Stock Market Can't Get Stranger

The straight line up and lack of volatility for stocks is an outlier rather than the norm.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

What's been unusual about this year's market ascent is not how much stocks have risen. A gain of 12% for the SPDR S&P 500 ETF (SPY) through seven months of the year, while impressive, is well within historical norms.

Rather, it's been the consistency and uniformity of the rally that has caught everyone off guard. In the ETF world, an investor could almost throw a dart and come up with gains. Everything from mega-caps to large-caps to midcaps to small-caps is up. 

 

TickerFundYTD
Return
(%)
DIASPDR Dow Jones Industrial Average ETF11.5
SPYSPDR S&P 500 ETF11.9
VOVanguard Mid-Cap ETF11.5
IWMiShares Russell 2000 ETF7.2

 

Nor have investors had to deal with any kind of adversity. Despite the disarray in the Trump administration, there have only been a few days in which the market has sold off more than 1% this year, and the largest peak-to-trough correction was around 3.3%.

The CBOE Volatility Index (VIX) perfectly illustrates how unusual this year's market environment has been. In an astonishing move, the VIX, which measures the implied volatility on S&P 500 options, fell to a record-low of 8.84 earlier this week as investors gave up on hedging their portfolios against a sell-off.

In fact, betting against the VIX using inverse exchange-traded products has been the best ETF trade of the year, with gains of more than 100% for the VelocityShares Daily Inverse Short-Term ETN (XIV) and the ProShares Short VIX Short-Term Futures ETF (SVXY).

Corrections Are Common

In a year like this, it's easy to get lulled into a false sense of security. Especially for new investors, who have only seen the stock market steadily climb, it's important to understand that a correction―or more ―is as inevitable as the rising sun.

Since the bull market began back in 2009, there has been a pullback in the S&P 500 of around 10% or more in every year except one―2013.

 

That doesn't mean a correction is necessarily coming soon, but it does mean they occur more often than many investors realize.

 

YearLargest
Correction
(%)
2010-17.1
2011-21.6
2012-10.9
2013-7.5
2014-9.8
2015-12.5
2016-12.2*
2017-3.3

Data measures correction from peak-to-trough, including intraday values. *Correction took place between the end of 2015 and early 2016. Drop was even larger (14-15%) when measured from late-2015 values. 

 

Expect The Unexpected

Meanwhile, the VIX is almost certainly not going to remain at these record-low levels and will eventually rise to and exceed its long-term average of 19.5. On that day, the "picking up nickels in front of steamrollers” strategy of shorting volatility will be hammered.

Even more, at some point, the current bull market itself will end, ushering in a much steeper decline in the stock market exceeding 20%, 30% or more. It's easy to forget that the S&P 500 dropped more than 50% on two occasions between the years 2000 and 2009.

Zooming out further, it's also worth remembering that the longest economic expansion in U.S. history is 10 years, and we're more than eight years into the current one. Eventually, there will be a recession.

The point of these figures isn't to frighten, but to remind investors that the current stock market environment is an outlier rather than the norm. Expect stocks to sell off and volatility to return―at any moment.

A large part of investing is psychological, and expectations play a big role in determining whether someone can stay the course or whether they’ll succumb to bad, short-sighted decisions when the market takes a turn for the worse.

At the time of writing, the author held none of the securities mentioned. Contact Sumit Roy at [email protected].

 

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.