Stocks could be set to underperform, if past is prologue
Schaeffer's Senior V.P. of Research Todd Salamone noted last week that historical volatility (HV) on the S&P 500 Index (SPX) has been in the single-digits for an extended period. The last time this occurred was in early 2007, which preceded a major bear market. We were curious whether this was a common occurrence just before bear markets. Below is what we found when looking at previous times stock volatility was so low for an extended period.
120-Day Streaks Are Rare for the S&P 500
The 20-day HV of the S&P 500 has been below 10% for almost six months. As of last Thursday, it had been 120 straight trading days of sub-10% historical volatility. This is a rare event. The last time the streak lasted 120 days was over 10 years ago, in early 2007. It is only the 10th time the streak has lasted this long since 1928, the earliest point of S&P 500 data.
The table below summarizes the S&P 500 returns after these streaks. Stocks have tended to struggle, which is surprising. It was assumed that these periods of low volatility would typically occur during bull markets and would result in above-average returns going forward. However, looking at the average return and percentage of positive returns after these streaks reach 120 days, the index has underperformed.
The table below shows data for each individual streak. It is hard to predict how long we expect the streak to last. Previous streaks have lasted a between 130 trading days, which would be another two weeks, to 371 days, which would be about another year.
What Does This Mean For Stocks Going Forward?
Hopefully the S&P 500 can buck the trend this time around, as far as returns following these prolonged periods of low volatility. Four of the last five times have resulted in losses over the next six months. Three of the last five saw losses over the next three months.
