The Stock Market is in Its Longest Stretch Without the 2% Sell-off Since the Financial Crisis

Wall Street's steady climb to record highs has been marked by remarkably low volatility.

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The S&P 500 has now gone 377 days without a single 2.05% sell-off, the longest stretch since the great financial crisis, according to FactSet data compiled by CNBC. Interestingly, the index has also not experienced a gain of at least 2.15% during this period.

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This period of market calm coincides with a surge of investment in megacap tech stocks, such as Nvidia, driven by optimism that artificial intelligence will significantly boost profits. Year to date, the S&P 500 has risen over 14%. Expectations of Federal Reserve rate cuts have further supported the index in 2024, as new data shows inflation nearing the central bank’s 2% target.

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Adam Turnquist, chief technical strategist at LPL Financial, commented, “At a high level, the clouds of macro uncertainty have parted over the last 12 months as receding inflation provided much-needed clarity into the future path of monetary policy. The changing narrative from rate hikes to rate cuts and recessions to economic resilience helped drag the VIX down to multiyear lows, ultimately shifting the backdrop for stocks to a low volatility from high volatility regime.”

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The CBOE Volatility Index (VIX), widely regarded as Wall Street's fear gauge, hit its lowest level since November 2020 last month. On Friday, it was trading around 13, close to historically low levels.

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Joseph Cusick, senior vice president and portfolio specialist at Calamos Investments, noted, “The low VIX reflects the options market’s complacency, with VIX at a three-year low. This makes sense since institutions have been actively hedging; there is no urgency to sell underlying with these insurance products in place.”

However, the duration of this low-volatility period is uncertain.

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In 2017, the S&P 500 recorded just eight daily moves of more than 1%, while the VIX dropped to historic lows below 9. The following year, volatility returned to the market, with the VIX surging above 50 before settling back down.

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The current environment has seen investors piling into large tech stocks, betting that advancements in AI will drive significant future profits. Nvidia, in particular, has been a major beneficiary of this trend, propelling the overall market higher. This optimism has been supported by positive economic data and the belief that the Federal Reserve will soon cut interest rates.

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The reduction in inflation has provided much-needed clarity on the future of monetary policy, easing fears of aggressive rate hikes. This shift in expectations has contributed to the subdued volatility, with the market transitioning from a high-volatility to a low-volatility regime.

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The VIX, often seen as an indicator of market fear, reflects this new reality. Its decline to multiyear lows indicates a lack of immediate concern among investors, who are relying on hedging strategies to protect their positions. This has reduced the need for urgent selling, further stabilizing the market.

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Yet, the stability of this low-volatility environment remains in question. Historical patterns suggest that periods of low volatility are often followed by sharp increases. The experience of 2017 and 2018 serves as a reminder: after a year of minimal market movement, volatility returned with a vengeance, pushing the VIX above 50 before it settled back down.

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In conclusion, while the S&P 500 has enjoyed a remarkably stable rise to record highs, driven by confidence in AI-driven profits and anticipated Federal Reserve rate cuts, the sustainability of this low-volatility period is uncertain. Investors should remain vigilant, as history shows that such calm periods can be precursors to significant market turbulence.

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