Last night the Federal Reserve raised interest rates by 0.25% to a new target range between 0.75% and 1.00%. But equity markets focused more on what the Fed said next, alluding that it was not in a hurry to tighten monetary policy further than what they had already outlined.
US equities rallied as a result.
All the major indexes had gains between 0.5% and 1.5%, and the S&P 500 finished just 0.4% short of its record close.
Impressively, the S&P has gone 105 consecutive days without a decline of 1% or more, and the CBOE volatility index (VIX), in turn, is close to 10-year lows, at 11.63.
(Source: LPL Research, FactsSet)
What does this tell us about the future?
According to Ben Morris of Stansberry Research, the VIX has only stayed at or below 13 for this long 7 times since the index was created in 1990. While a sample size of 7 is far too low to draw any strong conclusions, in 6 out of those 7 times, the S&P performed poorly in the following 3 months, but positively in the following 6.
“Except for one of the seven occurrences, the S&P 500’s one-, two-, and three-month returns were not good. There’s a clear negative bias…
(The “Start Date” column marks the end of the second month with a VIX at or below 13… and is the start of the following periods.)”
Start Date 1-Month 2-Month 3-Month 6-Month 12-Month 9/7/1993 0.5% -0.2% 1.7% 1.8% 2.9% 2/2/1994 -3.6% -7.0% -6.4% -4.9% -1.9% 7/29/2005 -1.8% -1.4% -4.5% 4.1% 3.4% 1/6/2006 -2.4% -1.0% 0.8% -1.4% 9.9% 4/13/2006 0.4% -4.6% -4.1% 5.7% 14.1% 11/10/2006 2.2% 3.7% 5.4% 9.6% 7.3% 7/15/2014 -1.3% 0.6% -5.0% 2.5% 6.8% 3/2/2017 ?? ?? ?? ?? ?? Average -0.9% -1.4% -1.7% 2.5% 6.1% Median -1.3% -1.0% -4.1% 2.5% 6.8% Up / Down 3 / 4 2 / 5 3 / 4 5 / 2 6 / 1
(Source: Stansberry Research)
But the negative results are far from catastrophic with the largest pullback being 6.4% after 3 months.
On the other hand, Ryan Detrick from LPL Research analysed the last 10 times when the S&P 500 spent more than 100 days without a 1% drop. He found that the S&P’s one-, three- and six-month median and average returns were positive after the streak of 100 or more days ended. Here are his findings:
(Source: LPL Research)
“After a streak of 100 or more days without a 1% drop has ended, the S&P 500 has been up a very impressive median return of 14.4% a year later and higher 75% of the time. In other words, a lack of big down days or a lack of volatility by itself isn’t a warning sign.”
The big takeaway…
The bull market is highly likely to still be intact, but a pause here and possibly a small pull back should not be discounted in the short term.
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The information contained in this article is General in nature and has been prepared without taking into account your objectives, financial situation and needs.