No Volatility?

It’s important to constantly review the level of volatility in the market to quantify how unusual the market has been this year. To a long-term investor, normal changes in volatility shouldn’t matter. However, when records are constantly broken, we need to re-evaluate the market to see what’s going on. The Dow Jones Industrial Average is currently on a streak of days without an intraday move of 1%. The streak is 51 days, making it the longest one since 1930. The unusual part is that the second longest streak was 50 days and that happened from late 2016 to early 2017. The third longest streak was 34 days in 2016. This two year period has been the quietest in history according to many metrics. One of those is shown below. It is the percentage of days with less than a 1% intraday range in the Dow. As you can see, 95.7% of days meet that qualification making it the highest ever. It’s interesting to see how every year in this table is from either the 2010s, the 1940s, or the 1950s. None of the years in the 1990s made this streak probably because of the movement upward of over 1%.

It’s difficult to pinpoint why stocks aren’t moving. The idea that volatility is suppressed by ETFs probably isn’t true because only 6% of stocks are controlled by ETFs. Another possibility is QE. The chart below shows the historical balance sheet of the Fed. As you can see, it was high during the 1940s and the current market. This could be correlation not relating causation to or it could be a signal of the market being affected by the asset purchases made by the Fed. We’ll find out soon enough as the Fed is expected to unwind its balance sheet to about $2.5 trillion in the next few years.

Speaking of Fed policy, the Fed is having its November meeting on Wednesday. I don’t expect any hike in interest rates or any tone change. The Fed is expected to raise rates in December. These are the last few meetings where Yellen will be in charge. I think we will see a quick shift from the media and the markets as they zero in on Powell’s thoughts. Yellen is probably still important because he has a similar outlook to her. We will get the Powell selection in the next few days. Powell is at an 80% chance of being picked and Taylor is at 8%. The decision will most likely be made public on Thursday. It’s a break in the historical trend because every single Fed chair in modern history who completed their first term was nominated for a second one. I have focused on this decision heavily because I knew President Trump was going to make this unprecedented decision. As it turns out, this choice is unremarkable as he went with a slightly more dovish version of Yellen.

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