For most of May, markets were relatively calm. Stocks didn’t move much, and investing looked boring again.
Then, last week, the S&P 500 index SPX, +0.45% rose or fell by more than 1% in three out of the four days of trading after Memorial Day, and the Dow Jones Industrial Average DJIA, +0.72% gained or lost more than 200 points in each session.
Wall Street gurus found all kinds of “reasons”: a political mini-crisis in Italy, President Trump’s slapping tariffs on some of our closest trading partners, and a grand slam of a jobs report that showed unemployment at 3.8%, an 18-year low.
But the big takeaway from last week is that risk and volatility are back, and I think they’re going to be around for years.
Here’s why. We’re now stuck between a very good economy, lower taxes, and deregulation on the plus side and an erratic, thoroughly unpredictable president on the minus side.
Investors are trying to gauge how much of the positive news already is priced into stocks and how much of the unpredictable they can actually quantify. That’s behind the huge swings in share prices we’ve seen.
Through Monday, the S&P 500 had risen by 1% or more on 21 trading days in 2018 and fallen by the same amount on 15 days. That’s 36 trading days that have seen moves of 1% or more, and the year has seven months to go.
The S&P has averaged 53 trading days of 1% moves or more annually since 1958, according to Jessica Rabe of DataTrek Research. If current trends continue, 2018 will easily top that average—and it’s already had more than quadruple the eight trading days of 1% moves in all of 2017, which now looks like the proverbial calm before the storm.
And then there’s the CBOE Volatility index, or VIX. Based on options trading in S&P 500 stocks, the VIX measures traders’ expectations for volatility over the next 30 days. After sitting like a toy boat in a bathtub last year—the VIX made an all-time closing low of 9.14 last November—it has suddenly hit turbulent seas, as this chart shows.
The VIX peaked at 37.3 in February amid a brouhaha about higher interest rates and trading losses of VIX-related ETFs. That was ridiculously high, even way above the 25.76 closing high after the U.K.’s Brexit vote in June 2016, and traders soon returned to their senses. But even on calm days, the VIX is much higher than it was last year: On Friday it closed at 13.46 as stocks rallied following the jobs report.
And Rabe points out in a blog post that historically the VIX has tended to peak in August and November. “If you think withstanding volatility so far this year has been tough, it’s likely only going to get more difficult in the back half,” she writes. “Last year’s complacency is solidly in the rear view mirror.”
All last year, Wall Street giddily anticipated tax cuts like a spoiled rich kid waiting for Daddy to buy him a Lamborghini for Christmas. Investors had eyes only for the “good” Trump, while the “bad” Trump lurked in the shadows.
But soon after the president signed the Tax Cut and JOBS Act in December, its impact quickly hit companies’ bottom lines. Goldman Sachs recently said the boost companies got from tax reform was on its last legs. Investors also appear to have discounted big earnings gains anticipated over the next few quarters.
That has led Wall Street to focus once again on the president’s “unpredictability.” Within the last two weeks alone, he imposed tariffs on steel and aluminum from the European Union, Mexico and Canada; ordered the Commerce Department to investigate whether auto imports are a threat to national security, with an eye to a 25% tariff on imported vehicles; reportedly wants to block German luxury cars from entering the U.S., and torpedoed a potential Nafta deal when Vice President Mike Pence insisted on a five-year sunset clause at the last minute. Canadian Prime Minister Justin Trudeau called the tariffs “insulting and unacceptable” and vowed to retaliate.
In the 500 days of his administration, President Trump has often flip-flopped, talking tough one day only to cave the next, and has repeatedly undercut his own cabinet and GOP congressional leaders. Hardcore Trumpkins, who seem constitutionally incapable of criticizing their Beloved Leader, say that unpredictability keeps our adversaries off guard.
But it keeps allies and investors off guard, too. Since that appears to be the nature of the beast, and some of these problems—like trade—appear to have no endgame, we’re likely stuck with this higher volatility as long as this president is in the White House.
