Back to normal feels anything but average for stock bulls in 2018

A sculpture of a bull stands as an electronic ticker board displays stock prices overhead at the Shenzhen Stock Exchange. (Bloomberg pic)

NEW YORK: As bad as it repeatedly has seemed, in the end 2018 really was a ho-hum year for stock turbulence. So why did it feel so harrowing?

Simple. Because of how abnormally calm things were in the past.

Going by one indicator, the average daily value for the Cboe Volatility Index, 2018 isn’t far from the median year in terms of the size of equity swings over the past quarter century.

The VIX averaged 16.6 over the 250 trading days, the 12th-lowest reading since 1993.

But take the number and compare it with 2017’s average of 11.1, and the difference – the rate at which swings widened – starts to get historical.

Look at it this way. Over the last 12 months, the mean wire-to-wire move in the S&P 500 was 1.88% per calendar week, almost three times the previous year’s average change.

The ratio between the two is larger than any other single-year increase since at least 1929, data compiled by Bloomberg show.

“It felt like a much more erratic market because, A, it was, and, B, we were lulled to sleep by last year’s lack of volatility,” said Rick Bensignor, president and founder of the Bensignor Group and a former Morgan Stanley strategist. “Emotions are running high right now, and last year emotions were asleep.”

As much as anything, the violence of the awakening explains the challenges that have cropped up in another high-profile process of normalization: Federal Reserve Chairman Jerome Powell’s withdrawal of stimulus from the U.S. economy. Four rate hikes in 2018 have bred an unremarkable level of turbulence in stocks – and Powell is accused in some quarters of a giant policy blunder.

It’s the mirror image of 2017 and much of the bull market, when Fed policy-makers were sometimes blamed for engineering a market advance of astonishing calm. One thing’s for sure, it left investor nerves unprepared for the roller-coaster ride in 2018, which featured two separate S&P 500 corrections.

“We’re back to normal volatility,” John Spallanzani, portfolio manager at Miller Value Partners, said in a phone interview.

“Many people in the market have not been around that long.

“All they know is a low rate environment and a low volatility environment, and that’s not the norm. For a healthy market you need both. Few are used to or have experienced a tightening cycle. And even fewer from a level of negative interest rates,” he said.

Not that bulls didn’t take their lumps. Down 6.5%, 2018 was the S&P 500’s first noticeably down year of the bull market, with fewer than 170 of its constituents posting gains.

The index posted five single-day drops of more than 3%, more than in the last three years combined.

The S&P 500’s price-to-earnings ratio fell 5.3 points this year to 17, data compiled by Bloomberg show.

Larger full-year declines in P/Es have occurred only two times since the data started being collected in 1954, and there were bear markets during both: 1973 and 2002.

“There will be a lot more volatility,” said Dave Campbell, a principal at BOS, a San Francisco-based wealth management firm with around US$4.2 billion (RM17.36 billion) in assets under management.

“We’ve been reminding clients that the lack of volatility that we saw the prior three years was abnormally low. People didn’t notice it was abnormally low. We’re getting back to normal market volatility with some big gyrations.”