Just when you thought it might be safe to buy-and-hold again … stock market volatility is back with a vengeance.
2015 is not even three months old yet — just 56 trading days so far in fact — and already the S&P 500 Index has risen or fallen 1 percent or more 15 times, according to Bloomberg.
During 2014 by contrast, the stock market moved 1 percent or more only 10 days per quarter.
Welcome to an aging bull market, which turned six years old last week. Anxiety naturally runs a bit higher as investors try to handicap how much upside remains at this point.
This is especially true with the S&P 500 Index up over 200 percent since the March 2009 low.
What’s more, there is no shortage of tricky cross currents for investors to navigate at the moment.
Case in point: Yesterday’s volatile price action after the Federal Reserve meeting. Geo-political concerns, slumping commodity prices and worries over rising interest rates are other legitimate concerns that are fueling market instability.
So it’s no surprise that daily stock market moves of 1 percent or more are up 50 percent from last year.
|It’s worth keeping a watchful eye on the uptrend in market turbulence.|
And it’s worth keeping a watchful eye on the uptrend in market turbulence, because rising stock market volatility has coincided with 10 of the last 13 stock market peaks since 1946, according to Bloomberg data.
But there will always be geo-political concerns for markets to contend with, and higher interest rates don’t mean the end of the road for this bull market. In fact, our own research confirms this. In the past, stock prices have kept on rising in spite of Fed rate hikes.
However, research by Sam Stovall at S&P Capital IQ reveals that rising volatility tends to increase during the six-months preceding the first Fed rate hike. In fact, during the last 16 interest rate tightening cycles the stock market experienced sharp sell-offs on 13 occasions in the six months prior to the first Fed rate hike, with the S&P 500 declining a median 10 percent.
And if the consensus is right that the Fed could act as soon as June, we’re in that period right now. So far this year the S&P has experienced wide swings several times and is about flat year-to-date. But it has been almost three and one-half years since the last 10 percent-plus correction in stocks, meaning we’re overdue!
Setting aside worries about the Fed, Europe or geopolitics — which are difficult to assess anyway — I prefer to focus on the data, the raw numbers that can signal market trends.
And if you crunch the numbers on S&P 500 profit estimates, there is another cause for concern.
In the graph above, you can see the trajectory of S&P 500 profit estimates for the next 12-months (red line). And it’s plain to see the trend in profit estimates has been down since October 2014.
In fact, the estimated growth rate for S&P 500 earning is -4.9 percent for the first quarter of 2015, which ends March 31 for many companies. That would be the first year-over-year decline in profits since 2012, according to FactSet research! Top line sales for S&P 500 companies are also expected to decline year-over-year, by -2.8 percent.
And looking ahead, the profit picture doesn’t get much better, because analysts are forecasting earnings declines to continue in the second-quarter of this year (ended June) and for sales to keep declining through the third-quarter (September).
Bottom line: While everyone is focused on when the Fed might raise interest rates, a bigger concern for me is deteriorating sales and profit growth. The financial media hasn’t latched onto this story much yet, because they’re too busy trying to handicap Janet Yellen’s next move.
But I’m keeping a watchful eye on S&P 500 profits and you should too, because if fundamental sales and earnings keep trending lower, that could mean more downside volatility ahead for stocks.