The return of volatility to a market that has placidly delivered high average returns for six consecutive years may need a bit of explaining.
Then again, maybe not.
Maybe the very fact that the market has placidly delivered high average returns for six consecutive years is making investors nervous, and making 2015 a year in which intraday swings of 1% to 2% have been common so far — (though “death of volatility” research reports were all the rage in 2014).
A commentary by USAA equity fund manager John Jares attempts to put the return to volatility in context.
Jares’ perspective is well timed, coming as it does during the week in which the bull market has registered six consecutive years since the March 9, 2009, market bottom amidst a frightening global financial crisis that saw asset prices continuously plunge starting from the Fall of 2007.
Noting that the subsequent 72 months brought average annual returns exceeding 23%, Jares writes:
“The question before markets opened Tuesday was “Can the bull keep running for another year?” The showing on day one of year seven — a 1.7% drop in the S&P that pushed the index down into negative territory for 2015 — was not an auspicious start.”
The USAA manager argues that key questions concerning monetary policy and economic trends are heightening investor uncertainty, thus fueling the current volatility.
The monetary question involves whether and when the Federal Reserve will raise short-term interest rates. The six-year-old bull market occurred in its entirety amidst a backdrop of zero or near-zero rates, making the prospect of Fed tightening … frightening.
That said, Jares points out that conventional market factors have contributed to higher stock prices, including Q4 earnings that have exceeded analyst estimates and an improving economy that has registered rising wages, job growth and high consumer confidence.