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Things Are Not Always As They Appear

The more things change, the more things stay the same. Another week has passed and there were no major changes in the stock market. U.S. Equities continue to lead; with International Equities close behind. The strongest stock market sectors also continue to be Technology, Financials, and Industrials. Not much has changed in 2017.

So far this year, we have witnessed historically low levels of volatility. Perhaps the biggest story of 2017 is the complete and utter disregard that the U.S. stock market has shown for the myriad of major headline events that we have witnessed so far. There have been numerous natural disasters; even more saber rattlings from North Korea; and still more social media balloons floated by the White House. In the face of all this, the stock market has been given plenty of opportunities to implode, or at least display some sort of pronounced reaction. Instead......(insert the sound of crickets here) nothing! This extended period of low volatility is not often observed in the U.S. stock market and certainly has the pundits perplexed.

The S&P 500 Index has gained more than 13% this year. As I noted above, it has done so with an extremely quiet set of "ups and downs" that hasn't been experienced in over 40 years. Earlier this year, the S&P 500 index went 58 days without a single price change that was greater than +/- 1% of its previous day's closing price. We've now gone 232 trading days (almost a year) without a daily price move of more than +/- 2%. So, are we due for a 2% rise or fall? Not so fast. The longest period on record without a 2% change in daily price occurred from October 2003 through June 2006. This equated to 680 trading days. Through the first three quarters of 2017, only 8 days have experienced a price change of 1% or more. That means 96% of all trading days so far this year have finished with less than a 1% change from the day before. The historic average is 76%. Where is the volatility? While 2017 is not yet over, there has not been a year this "quiet" since 1972!

So why does this market feel so jittery when in fact it is not? I read recently an explanation as to why we may feel that this market is volatile even though in reality it has been uncharacteristically calm. When headlines remain vitriolic, it is far too easy for the typical investor to feel volatility that doesn't exist. This occurs in much the same way that a young NFL quarterback might feel a rush from the opposing defense that simply isn't there. A savvy defensive coordinator will often send just three rushers in an obvious blitz situation (3rd and long, for instance), begging an inexperienced passer to panic and throw the ball in the direction of any one of the eight defenders now waiting for their opportunity to run the other way with it. That's right! We are just imagining it! Our minds are being tricked by the constant headlines that are touting the next big scary thing. So turn off that TV and put down that newspaper. They are just making you feel market volatility that isn't there. This in turn, makes you loose faith in your investments.

In spite of all of the daily shocks that should be derailing this market, the 2017 stock market continues to calmly march forward. When my indicators tell me that this is no longer the case, our portfolios will adapt. Until then, we will stay the course and remain confident in the methodology.