3 Reasons There’s No Volatility
It’s been a long time since the S&P 500 has suffered a major correction.
In fact, it’s been 745 days since the last time the S&P 500 endured a correction of 10% or more. That’s more than two years!
According to Goldman Sachs, the market typically has a 10% to 15% correction every two years. By this measure, we’re overdue for a big correction.
There are three reasons why we haven’t seen the typical market volatility over the last few years. Let’s take a closer look at what’s preventing a major correction…
First off, it’s the Fed.
As Fed Chair Janet Yellen said last week… monetary policy depends on the economy.
If growth is sluggish, they’ll keep rates low and use bond purchases to pump up the economy. If the economy slows, they’ll ramp up their bond purchases, known as quantitative easing, to juice up the economy. And most importantly, they won’t hike interest rates until the economy is growing strongly.
In short, the Fed is offering free insurance on the stock market.
Secondly, stock repurchases are near all-time highs.
Publicly traded companies have lots of choices when it comes to spending their profits. The most common are reinvesting in new opportunities to grow the business, paying a cash dividend, or buying back their own stock.
Right now, repurchasing their own stock seems to be the favorite way companies are spending money. These stock buybacks are often executed when the share price falls.
It’s like having an automatic buy order that absorbs shares that are sold by outside investors. Needless to say, when the company is buying its own stock, it helps prevent a major selloff and keeps volatility low.
Last of all, there’s been a shift in the way money is managed.
There has been a major change in the way stock brokers manage their high net worth clients’ money. It’s gone away from transactional fees toward a managed account platform.
In a transactional model, the broker is paid for executing trades. If the client doesn’t buy or sell anything, the broker doesn’t make any money. This leads stock brokers to recommend lots of buying and selling. It’s how they make money.
Under a managed account, the client simply pays the broker a fee that’s a percentage of the dollar amount of money being managed. There aren’t any transaction fees so there’s no reason for the broker to recommend lots of buying and selling.
What’s more, the money that comes into a managed account is put to work in a slow and methodical fashion. It doesn’t matter if the market is going up or down. The money is put to work as part of a plan, not based on one stock broker’s opinion of whether it’s a good time to buy or sell.
This managed account strategy is one reason why the amount of assets in ETFs has surged to record highs. And it’s why we see less selling when the market ticks down for a few days.
Here’s the bottom line…
Stocks are overdue for a 10% correction. But as long as the Fed policy, stock buybacks, and the shift toward managed accounts remains intact, we’re not likely to see it happen. And I don’t see any of these things changing anytime soon.
Good Investing,
Corey Williams
Category: ETFs, What's Going On?
