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The year after Donald Trump’s surprise victory in the US presidential election have been the quietest months for the US stock market in more than half a century.
Since election day, the daily change in the S&P 500, the most widely followed index of US stocks, has been only 0.31 per cent as the blue-chip index has set new record highs. The is the lowest daily change in more than 50 years.
Many have expressed surprise that markets have stayed calm amid the brinkmanship over North Korea’s nuclear weapons programme, but there is historical precedent for a sharp contrast between the strong performance of stocks and a turbulent political backdrop.
A Financial Times analysis of historic returns for the S&P 500, dating back to its inception in 1927, shows only one previous period with lower average volatility. The quietest 12 months on record also followed a political shock, starting a week after the assassination of John F. Kennedy in 1963. The period saw an average daily movement of only 0.25 per cent.
During those 12 months, the US also witnessed the presidential campaign between Lyndon Johnson and Barry Goldwater, which was thought at the time to signal new levels of acrimony, and the passing of the Tonkin Gulf resolution which paved the way for a major expansion of US involvement in the Vietnam war. The 1962 Cuban missiles crisis, when the world came its closest to nuclear war, was still fresh in memories.
Over the last half century, the index has moved by an average of 0.72 per cent each day, more than double the volatility seen this year.
In addition to the low level of realised volatility in the S&P 500, investors have also hedged against future volatility in a way that shows they are not too concerned it will pick up. The CBOE’s Vix index, which is derived from 30-day S&P 500 options prices and was launched in 1990, hit its lowest intraday level in July and remains near that level.
The strategy of “selling vol”, or betting on a fall in the Vix in the futures market, has been dramatically successful under Mr Trump. Over the past 12 months, the exchange-traded fund offered by BlackRock that mimics the result of selling the Vix has gained about 200 per cent.
“Low volatility strategies have also been a major beneficiary of central bank purchase programmes, with such interventions possibly reinforcing the belief that ‘low vol’ should be equated with low risk,” said Jacob Mitchell, chief investment officer of Antipodes Partners in Sydney. He also warned: “The longer a low volatility environment persists, the greater the average equity market drawdown when it ends.”
The combination of low volatility with very strong returns has spurred exceptional risk-adjusted returns, which are usually measured by the “Sharpe ratio”, which divides annual returns by annual volatility.
“Sharpe ratios were higher a couple of times in the 50s and in the 90s, but the current Sharpe ratio would put this rally in the 0.3 percentile of the best times in history,” said Vincent Deluard, head of global macro strategy at INTL FCStone. “Let that sink in: this stock market is better than 99.7 per cent of the times since 1900.”
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