Price swings in U.S. stocks are narrowing the most since the Great Depression, a signal of reviving investor confidence that’s fueling the bull market poised to enter its fifth year.
Average daily price moves for the Standard & Poor’s 500 Index have fallen to 0.43% in 2013 from an average 1.08% the past five years, the steepest decline for any corresponding period since the 1930s, according to data compiled by Bloomberg. The last time the annual average was this low was 1995, when the S&P 500 surged 34% and doubled in the next four years. Stocks gain an average 17% during years when the gyrations are so small, the data going back to 1928 show.
The combination of declining volatility and the best start to a year since 1997 is prompting bears to warn that investors are growing complacent as the rally ages. Bulls cite smaller fluctuations as another reason to buy, on top of rising earnings forecasts, below-average valuations and the biggest deposits in equity mutual funds in nine years.
“Switching from net outflows to net inflows has been a big part of volatility being dampened,” Michael Shaoul, the chairman and chief executive officer at Marketfield Asset Management, said in a Feb. 14 phone interview.
“There’s net buying, so it’s much, much easier for the market to stabilize,” said Shaoul, who oversees more than $5 billion in New York and has beaten 96% of peers in the past five years. “Then you have a feedback loop with the retail investor, who sees a more sedate market and that encourages people to give more allocations to funds.”
The S&P 500 climbed 0.1% to 1,519.79 last week for a seventh week of gains and the longest winning streak in two years. The benchmark U.S. equity gauge is up 7.3% in 2013 after the best January since 1997 and is about 2.2% below 1,565.15, the record reached in October 2007 before it retreated 57% through March 2009. The index rose 0.7% to 1,530.94 today.
The S&P 500 swung more than 1% on four days in 2013, down from an average of seven days a month during the past five years, Bloomberg data show. Volatility was that high for 122 days in 2008 as the housing market collapsed, Lehman Brothers Holdings Inc. filed for bankruptcy and investor confidence was shattered by the plunge in U.S. equities that wiped out $11 trillion of market value.
Price swings haven’t been so narrow since 1995, when the S&P 500 rose or fell about 0.38% per day. The benchmark gauge’s 34% advance that year, the biggest since 1958, set the stage for a five-year rally, the data show. Average daily volatility at 0.40% coincided with a 16% gain for the S&P 500 in 1972 and a 20% surge in 1967, according to the data.
Halliburton Co., FedEx Corp. and Textron Inc. are among the stocks that have seen their daily price changes narrow by at least 0.6 percentage point this year.
“The retail investor is swayed by the ups and downs of the market, especially after 2008,” Eric Teal, chief investment officer at First Citizens BancShares Inc., which manages $4.5 billion in Raleigh, North Carolina, said in a Feb. 14 phone interview. “We haven’t had a lot of external shocks to the market like we’ve had in the past years, so it’s a little more encouraging for them and I would expect to see them keep pulling money out of bond funds and into equity funds.”