Back To Normal In Stocks Feels Like Trauma As U.S. Bull Run Ages

Currency Blow

The index posted the second-biggest loss of the year on March 10, dropping 1.7 percent, as the dollar’s ascent to highs not seen since the invasion of Iraq stoked concern that the currency blow to earnings from companies like Procter & Gamble Co. to Pfizer Inc. may be worse than expected.

Rising volatility has coincided with 10 out of the past 13 market peaks since 1946, data compiled by Bloomberg show. In 2007, when the S&P 500 climbed to a record in October, the average daily move widened to 0.72 percent from 0.47 percent a year ago. As concern over subprime mortgage contagion and hedge fund losses exacerbated selling, the number of days with the index swinging at least 2 percent surged to 17 from two.

“We’re seeing the parallel,” said Lucas Turton, chief investment officer for Boston-based Windham Capital Management LLC, which oversees $2.8 billion. “What tends to happen is an almost avalanche effect that as risk begins to rise, it’s self- perpetuating. Not to call a market crash today, but this is a period to be more defensive.”

First Hike

Volatility is poised to rise further, according to Sam Stovall, an equity strategist at S&P Capital IQ. He studied stock performance during the last 16 tightening cycles and found that 13 of them were preceded by equity losses over the six months before the first rate hike. On those occasions, the S&P 500 fell a median 10 percent from peak to trough.

Fed policy makers may remove the pledge to be “patient” in deciding when to begin raising interest rates after a two-day meeting ends March 18, according to firms including BNP Paribas SA.

Options traders are embracing hedges with the bull market, at almost 2,200 days, about two months away from overtaking the 1974-1980 run as the third-longest since 1929. The Chicago Board Options Exchange Volatility Index, a gauge of costs for S&P 500 options, has jumped 20 percent this month. Still, at 16, the VIX is 20 percent below its average since the inception.

“We’ll only get back to a more normal market mechanism when we get back to more normal monetary policy,” said Scott Clemons, the chief investment strategist at Brown Brothers Harriman Private Banking from New York. His firm oversees $27 billion. “Volatility is certainly heightened, and I believe it’s here to stay.”