One of the most notable characteristics of the U.S. stock market in 2017 was how quiet it was, with major equities hitting a record number of records on little volatility. This environment has been very good for investors, and it may not end soon.
The “exceptionally low volatility” seen over 2017 “is reflective of the fundamentals driving volatility rather than investor complacency,” Morgan Stanley wrote in a note to clients. While some of the factors that contributed to the quiet market—including accommodative Federal Reserve policy and secular stagnation—are ending, in the point of view of the investment bank, traders shouldn’t necessarily expect 2018 to be altogether too different from this past year.
“We expect higher bouts of equity volatility next year. but it make take many years to fully normalize,” it wrote.
According to the WSJ Market Data Group, the average absolute daily percentage change for the Dow Jones Industrial Average
was 0.31% in 2017. It was 0.3% for the S&P 500
and in both instances, that represents the smallest absolute daily percentage since 1964. For the Nasdaq Composite Index
the absolute daily percentage change was 0.44%, the smallest since 1989.
The average observed one-month volatility in the S&P 500 was lower than any other year since 1970, according to data from S&P Dow Jones Indices. Separately, Goldman Sachs wrote that realized volatility for equities ranked in the first percentile since 1950, and that “implied volatility suggests this regime will persist in 2018.”
Of the 56 lowest closing levels in the history of the Cboe Volatility Index
(since 1990), 47 of them occurred this year, according to S&P’s data. The so-called “fear index” also notched two all-time closing lows.
Nick Clay, the lead manager of the BNY Mellon Global Equity Higher Income Fund, wrote that the lack of volatility was “the biggest surprise in 2017.”
He added, “It seems incredible to us how the markets have moved into Taylor Swift mode of ‘shake it off’ in terms of any bad news.”
The low volatility seen this year is just the latest example of a more longstanding trend. Si far this decade (since the start of 2010), the annualized volatility for the Dow has been 13.7%, according to data from Morgan Stanley. That’s below the long-term average, since 1900, of about 18%. “Realized volatility today is at the very low end of the past 120 years,” the investment bank wrote.
The VIX lasted traded at 9.29, less than half its long-term average of 20. For that reason, Morgan Stanley noted that volatility could rise without daily fluctuations reaching the extremity that investors may be used to.
“There is a good reason to believe equity volatility is likely to remain lower than the average of the past 120 years,” it wrote. “While the absolute level of equity volatility may remain lower than average, it can start to trend higher, albeit modestly.” (Emphasis in original)