Weekly Market Update (November 11 – November 15, 2019)

By Craig Fehr November 15, 2019

U.S. stocks reached another record high, rising for the sixth straight week -- the longest streak in two years. While trade negotiations remain fluid, the prospect of a limited-in-scope trade deal between the U.S. and China has been the key driver of the market rally over the past month. Global economic data remains mixed, with softer October retail sales and industrial production in China, but firmer-than-expected eurozone GDP. The global slump in manufacturing appears to be improving as the global manufacturing Purchasing Manager's Index has risen for three straight months, albeit from low levels. We believe underlying fundamentals could support further gains in stocks, but we don't expect the recent low volatility to persist indefinitely.

Is the Market Too Calm?
While there is no shortage of drama these days, you haven't found much of it in the stock market recently. Four new daily record highs were reached last week, bringing 2019's total to 221. The market has marched steadily higher as volatility has crept lower. Seven percent of the S&P 500's 24%1 rise in 2019 has come in the past six weeks, reflecting growing optimism from progress in the trade war, better-than-expected third-quarter corporate earnings announcements, and incoming data signaling that the U.S. and global economies are not careening toward recession. Meanwhile, fluctuations in the stock market have been quite low, with the VIX index (a measure of short-term volatility) falling near the lowest (most tranquil) levels of the year.

Is the market too calm?? That might sound as absurd as asking, "Is the weather is too nice?" or "Is there too much bacon?" We're not questioning the merit of the market's gains. After all, during the market sell-off last December and the pullback this August, we maintained our view that the bull market wasn't finished, as underlying fundamentals were supportive of further upside potential – a view we still hold today. However, we also recognize that market volatility is normal and inevitable. This is true even in strong bull markets, and particularly true in the latter stages of the market cycle, which we believe is the case currently. We don't think the bull market is done climbing, but investors would be well served to prepare for rockier conditions than we've experienced over the past few months.

Some perspective on volatility

  • The stock market has not experienced a daily move (up or down) of 1% or more in a month, reflecting the low degree of fluctuation amid the recent ascent to new highs. For perspective, we have seen a total of 38 1% daily moves in 2019, compared with 63 in 2018, eight (yes, eight) in 2017, 48 in 2016 and 71 in 2015. Extended periods of small daily swings in the market are not terribly uncommon (this is the second-longest stretch of the year, behind the 37-trading-day streak this summer), though we'd note that over the last decade, 2014 and 2017 were the only years where there weren't multiple 1% daily moves for the month of November.???
  • Using the VIX index as a measure, market volatility (price fluctuations) so far in November is running at the lowest monthly average since August 2018. Volatility since October 1 has declined notably from the preceding two months, the opposite from the trend over the past five years, where volatility has picked up on average in the October/November period.
  • An interesting, though more symbolic, indication of the market's recent tranquility was the Dow's move last Tuesday – or in this case, its lack of a move. The Dow Jones Industrial Average closed "unchanged" on the day, but a closer look reveals just how unique this was. The Dow is at nearly 28,000, but due to the 30 stocks inside of it, the index is actually calculated out to 10 decimal places. Tuesday's session was unchanged even out to the 10th decimal – something that has only occurred three times in the last 19 years, according to the Wall Street Journal.?
  • The bottom line: While the recent low volatility in the stock market is not abnormal, it's unlikely to persist indefinitely.? A string of positive news and data on the economy, trade and corporate earnings has underpinned the market's combination of new highs and small swings. We think these trends remain tilted to the positive, but setbacks on trade, periodic underwhelming economic releases, and a brighter spotlight on political rancor will, in our view, bring episodes of market volatility as we advance into 2020.???

What comes next??

  • There is no timetable on it, but when it comes to market volatility, there is an element of "what goes down, must come up."? 2017 is perhaps the most notable exception, when average monthly volatility was historically low, with the magnitude of market swings spending 11 of the 12 months below current levels. But over the past five years (excluding 2017 and using the VIX index as a measure), monthly volatility was below the present level in just four of those months (7% of the time).? Market volatility rose the following month in three of those four instances.?
  • Prior periods of low volatility2 saw the market rise by an average of 0.9% over the following two months. In terms of extended periods without a daily market move greater than 1%, since 2014 there have been eight such streaks longer than the current one.? The average change in the S&P 500 over the following two months was 0.5%.
  • Taking a longer-term view, in each of the instances mentioned above, the market was higher (often materially so) in each case 12 months later.
  • The bottom line: Periods of well-below-average market swings or longer-than-average streaks with small daily fluctuations have typically been followed by muted returns or market pullbacks in the period immediately following. They have not, however, signaled more severe negative outcomes or impending bear markets. For example, volatility was not low ahead of the financial crisis downturn. Instead, volatility had gradually trended higher for nearly two years before the onset of the sharp decline in late 2008.????

Volatility isn't a bad thing

  • While we don't anticipate this stretch of calm markets to persist indefinitely, we do think the broader path remains higher. For one, the economy continues to expand at a modest pace, corporate earnings are poised to rise again next year, and interest rates are not near levels that would threaten to choke off growth.
  • Moreover, extended periods of low volatility can breed complacency among investors, setting the market up for a shock.? We would not be surprised by a short-term pullback in equities in the coming months, but markets are not exhibiting a worrisome level of complacency, often characterized by a dismissal of prevailing risks. Stocks have been sensitive to bad news (there's just been less of it recently), and the ascent to new highs has been accompanied by defensive areas of the market performing well along with the more cyclical areas. This tells us there is still a degree of caution in the market, which helps reduce the risk of an immediate, sharp sell-off.
  • Rising volatility and accompanying sell-offs are never comfortable or enjoyable, but they may come with a silver lining – opportunities for long-term investors to rebalance, improve diversification and add investments at more attractive prices. Eventually, underlying fundamental conditions will begin to turn more negative (such as an eventual recession, restrictively high rates, and declining corporate profitability), at which point market volatility will reflect a more challenging outlook for the markets. We don't anticipate those conditions to emerge soon, however, meaning that a pickup in volatility and a pullback in the markets can be approached more constructively instead of as a sign of worse to come.?
  • The bottom line: Volatility is normal. When it resurfaces, the key to navigating it is to ensure you have 1) appropriately set expectations, 2) properly positioned your portfolio to help weather the swings, and 3) ensured your investment decisions remain consistently aligned with your financial goals, not emotional reactions to the inevitably sensational headlines.?

Sources: 1. FactSet, Edward Jones calculations, 2. Bloomberg, defined as a monthly average VIX index level below 13.

Craig Fehr, CFA

Investment Strategist

Index Close Week YTD
Dow Jones Industrial Average 28,005 1.2% 20.1%
S&P 500 Index 3,120 0.9% 24.5%
NASDAQ 8,541



MSCI EAFE* 1,962 -0.8% 8.3%
10-yr Treasury Yield 1.83% -0.1% -0.9%
Oil ($/bbl) $57.81 1.0% 27.3%


$112.41 0.5% 8.1%

Source: FacSet, 11/15/19.? *4 day performance ending Thursday. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.?

The Week Ahead

Important economic data being released include housing starts on Tuesday, the leading economic index on Thursday, and consumer sentiment on Friday. Several retailers are also scheduled to report quarterly earnings results next week.

Review last week's weekly market update.

Important Information

The Weekly Market Update is published every Friday, after U.S. markets close.

The Dow Jones Indexes are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use.

All content of the Dow Jones Indexes ? 2017 is proprietary to Dow Jones & Company, Inc.

The Dow Jones, S&P 500 and Barclays Aggregate Bond Indexes are unmanaged and are not meant to depict an actual investment.

Past performance does not guarantee future results.

Diversification does not guarantee a profit or protect against loss.

Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

This information is approved for use with the public.

It is intended for informational purposes only.

It is believed to be reliable, but its accuracy and completeness are not guaranteed.

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