By: Steve Smith
By almost every measure, 2017 will go down as the stock market’s least volatile year since 1944. The Dow and S&P S&P 500 Index have now not only gone without a 3% pullback –let alone a 5% decline—but intraday volatility has also collapsed. Today’s investing advice will explore how this has benefited those following a buy and hold strategy.
Both 2017 and 1944 have also had the most days in which intraday range has been confined to less than a 1% range.
All of this has caused option volatility on both individual stocks and the market in general as measured by the VIX, to drop towards historic lows.
This led me to take a more active role in earnings reports, as they create the type of changes in both price and implied volatility levels that options traders (and purveyors of investing advice) feast on.
Outside of these events, there has been pretty slim pickings for day-to-day trading activity.
I’ve pointed out how the rise of passive investing, especially through the use of ETFs, the low interest policy of Central Bankers, and program trading have helped dampen volatility and instill a Buy the Dip (BTFD) mentality in investors and conventional investing advice.
As Pension Partners adds these reasons for the steady gains:
- The story stocks (FANGs) are posting enormous gains and beating all expectations.
- Earnings are at a record high and profit margins remain near their highest level in history.
- The Unemployment Rate (4.2%) is at a 16-year low.
- Jobless claims are at their lowest level since 1973.
- The U.S. economic expansion, at 99 months, is the 3rdlongest in history.
- Manufacturing (ISM) sentiment is at a 13-year high.
- Consumer Confidence is at a 17-year high.
- Housing prices nationally continue to hit record highs, gaining 6% in the past year.
- Average hourly earnings are up 2.9% in the past year, their highest level of the cycle.
- Inflation remains low with core CPI below 2%.
- The Fed and remains extraordinarily easy (1-1.25%) as do central banks globally (negative policy rates across Europe and Japan). One of their primary objectives continues to include asset price inflation (“wealth effect”).
- On the policy front, investors have been promised massive tax cuts, unending deregulation, and a boom in infrastructure projects.
The upshot is that for active traders, especially those of us focused on options, it’s been a very challenging environment.
For buy and hold investors it’s been the most wonderful year.