Where have all the cowboys gone?

The year without vol. Without drawdowns. Without negative months for the S&P 500. Without any drama whatsoever in the markets. It’s almost as though there isn’t any drama left over now that the political situation is soaking it all up.

Here’s my colleague Ben writing at Bloomberg:

Not only have stocks been consistently profitable recently, but they have done so with remarkably low volatility. This year, there has yet to be a 2 percent move up or down on the S&P 500. For a frame of reference, in 2009, there were 55 separate 2 percent up or down days and there were 35 in 2011. The annualized volatility of daily returns on stocks since 1928 has been 18.7 percent. For 2017, that number is 7 percent, a little more than one-third of the long-term average.

The average absolute daily price change this year on the S&P 500 is just 31 basis points. If the year ended right now, that would be the lowest daily price change on record since 1965. The worst peak-to-trough drawdown is just 2.8 percent this year. Over the past 100 years, the average intrayear drawdown in stocks has been around 16 percent. The shallowest calendar-year peak-to-trough drawdown was in 1995, when the worst loss in stocks was just 3.3 percent for the year.

It’s tempting to want to bet on mean reversion and a meaningful, lasting spike in the vix. Can’t keep coming up on black every spin can it?

Well, historically it can. We went from 1990 until 1998 without a double-digit correction. Eight years.

So anything is possible.

The answer is probably wrapped up somewhere in the market structure conversation. The cowboys who used to swing markets with massive directional bets have largely replaced themselves with algorithms. Software programs don’t panic. They trade methodically or stop trading entirely given certain cues. They’re also inured to the psychological pain of new record highs – How could I not be in this? The market is running away without me! Oh my god what if I’m buying the top? etc

Nope. There’s much less of that than there otherwise would have been in another era. These days, it’s “close your eyes and allocate” coupled with relentlessly steady machine-buying.

For now.


A Remarkable Run for Stocks Gets More Extraordinary (Bloomberg View)

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