Volatility Surges in S&P 500 With Volume Lowest in Decade
Volatility in the Standard & Poor’s 500 Index is returning to levels that drove valuations and stock volume down to rates not seen since at least 2003.
Average daily price changes in the benchmark gauge for American equities doubled to 1 percent in June, according to data compiled by Bloomberg. At the same time, U.S. trading has plunged to 6.8 billion shares a day and valuations are 16 percent below the five-decade mean. Reaching those levels in tandem is unprecedented in at least nine years, the data show.
Investors whipsawed by volatility that reached twice the 50-year average in 2011 have pulled about $300 billion from mutual funds since the bull market began three years ago. With the third quarter marking the worst S&P 500 returns in election years since World War II, bears say widening price swings will keep individuals from returning to the market. Bulls say their exodus helped pull stocks lower just before growth in earnings and the economy helped spur the biggest June rally since 1999.
“We still believe in the bull market,” Laszlo Birinyi, president of Birinyi Associates Inc., said in a June 29 phone interview from Westport, Connecticut. “I’m just telling people to turn the page to the investments, the things that you can really quantify and put your fingers on. Stick to what truly matters: the company fundamentals.”
The S&P 500 rallied 2 percent to 1,362.16 last week, bringing the monthly return to 4 percent, the most for June since the gauge added 5.4 percent in 1999. European leaders agreed to relax conditions on emergency loans for Spanish banks and possible help for Italy, boosting stocks globally even as first-time claims for U.S. unemployment benefits were higher than economists forecast.
The gauge declined 9.9 percent from its high on April 2 through June 1 after climbing 12 percent in the first three months, the best start to a year since 1998. Shares in the S&P 500 are up 101 percent since March 2009, and remain 13 percent below the all-time high of 1,565.15 in October 2007. The index rose 0.3 percent to 1,365.51 today.
Mutual funds that invest in U.S. equities saw $1.8 billion in outflows for the week ending June 20 and $620 million in the previous period, according to data from the Washington-based Investment Company Institute. More than $190 billion has been taken out of American equity funds in the 13 months through May, while more than $200 billion has gone into bonds, the data show.
“A lot of investors are just frozen, unsure what to do, so they do nothing,” Howard Ward, who helps oversee $35 billion at Gamco Investors Inc. in Rye, New York, said June 26. “There are no raging bulls looking to leverage up on margin and risk their savings. Everyone is cautious, with some more so than others.”
Withdrawals are coming as swings in stocks from L-3 Communications Holdings Inc. (LLL) to Deere & Co. widen. The S&P 500 moved an average 1 percent each day in June, almost doubling from the previous five months, data compiled by Bloomberg show.
Volatility is rising toward its level in 2011, when price changes were 1.3 percent between April and the end of December, twice the five-decade average, according to data compiled by Bloomberg. Daily swings reached 4 percent in December 2008, data using 50-day moving averages compiled by Bloomberg show.
The flight from mutual funds helped lower daily volume for U.S. exchange-listed stocks to 6.8 billion shares in 2012, down 44 percent from its peak in October 2008, according to data compiled by Barclays Plc and Bloomberg.
Volume hasn’t been this light at the same time that valuations were below their historic average since at least 2003, when the data began. Of the 500 companies in the benchmark U.S. equity index, 262 of them saw June volume that fell from a year ago, Bloomberg data show.
“Investors are feeling the market as a roller coaster ride,” Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, which oversees about $40 billion said June 27. “All those gains that got made in the first quarter got wiped out in a month’s time. There’s just too much uncertainty to be making decisions, and there’s the risk that they’re going to get whipsawed again.”
Widening stock swings are a reversal of the first quarter, when daily changes narrowed to 0.5 percent, the smallest since 1995, the data show. The decline from the previous year was the biggest reduction since 1934, according to Bloomberg data.
Calmer stock markets attracted more money to mutual funds over the last decade. U.S. funds added $14.5 billion in the first quarter of 2007, when the average daily swing was 0.5 percent, data compiled by Bloomberg and ICI show.
More than $700 billion has been erased from American equity values since this year’s S&P 500 high of 1,419.04 on April 2, according to data compiled by Bloomberg. The retreat has trimmed the gauge’s 2012 advance to 8.3 percent from 13 percent.
Equities may be entering the worst period of the year, if history is any guide. The index has gained an average of 0.1 percent in third quarters before a presidential vote since 1945, the lowest return of the year, according to S&P. U.S. shares gained 5.7 percent in election years since World War II, the second-worst performance during executive branch terms.
“Most of the volatility is a lack of conviction on the part of the market,” Peter Sorrentino, a senior fund manager at Huntington Asset Advisors in Cincinnati, which oversees $14.7 billion of assets, said June 28. “It creates this element of fear because one sector is rocky one day and another sells off the next day. That dissuades people from committing any money.”
European leaders dropped requirements that taxpayers get preferred creditor status on aid to Spain’s banks and opened the way to recapitalize lenders directly after a two-day summit last week. Two years of losses have pushed European stocks near the lowest valuations ever, as the Euro Stoxx 50 Index fell to 0.9 times book value, cheaper than any time except the week markets bottomed in March 2009, data compiled by Bloomberg show.
Eric Teal, at First Citizens Bancshares Inc., said the corporate earnings season will convince investors to come back to the market. New York-based Alcoa Inc., the country’s largest aluminum producer, is scheduled to be the first Dow Jones Industrial Average (INDU) company to report results, on July 9.
“The lower-return environment and less appetite for risk- taking is having a compounding negative effect on the stock market,” Teal, chief investment officer at First Citizens, which manages $4.5 billion in Raleigh, North Carolina, said June 26. “Second-quarter earnings and more policy initiatives in the coming months will provide relief.”
L-3 Communications is down 15 percent in the past 12 months even as the company boosted its full-year profit forecast in April. The stock rose or fell 1.3 percent a day in June, up from 0.7 percent in the first five months of the year, data compiled by Bloomberg show. Daily trading in L-3, a maker of military communications and electronics equipment, fell 30 percent last month from the average in 2011.
Trading in Life Technologies Corp. (LIFE), the provider of gene- analysis tools based in Carlsbad, California, was 42 percent lower last month than a year ago. The stock fell 7.9 percent in the second quarter even after Life posted better-than-forecast earnings. Daily moves rose to 2 percent in June from 1.2 percent in the previous five months.
Average swings in Deere (DE), the largest maker of agricultural equipment, surpassed last year’s level to 1.7 percent from 1 percent between January and May, according to Bloomberg data. Volume in the shares has decreased to 3.6 million shares a day this month, 24 percent below the 2011 average. The shares are down 1.9 percent in the past year, even after Moline, Illinois- based Deere reported better-than-estimated earnings for all four quarters of 2011.
S&P 500 earnings have exceeded analyst projections for three years even as the world’s largest economy expands at its slowest post-recession rate in six decades, Bloomberg data show. They are forecast to surpass $100 a share for the first time this year and to rise 13 percent in 2013 while economists say the U.S. will expand 2.2 percent in 2012 and 2.4 percent next.
Higher profits kept the price-to-earnings ratio at an average 13.8 in the first six months of 2012, 16 percent less than the 16.4 mean since 1954.
“That’s one of the favorable things that is going on, corporate earnings are coming through,” Byron Wien, vice chairman of Blackstone Advisory Partners LP, said in a June 26 interview with Ken Prewitt and Tom Keene in Bloomberg Radio’s “Bloomberg Surveillance.” “The market is cheap. The problem is investors don’t have any confidence in the future because they are so confused.”
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