Equities enjoy big rally with few shocks in 2013 but drama ahead

Stock Ticker Climb Up

It's been a wonderful year to be a stock investor. Not only is 2013 shaping up to deliver the best returns of the past 10 years, it's also offered one of the smoothest rides.

The S&P 500 is up just more than 25% through Tuesday, putting it on pace to be the best single-year return since the 28.7% it climbed in 2003. What's made the returns even better, though, is the fact that they've come with the lowest volatility since before the financial crisis.

The Dow Jones industrial average, for example, has had only 24 days in which it finished up or down 1% or more, according to the December issue of the Independent Adviser for Vanguard Investors. That's the fewest such days since 2006. There also have been only four days that the blue-chip barometer finished up 2% or more; again, the most since 2006. The median number of days with 2% moves or more from 2007 to 2012 was 42.

The Chicago Board Options Exchange Market Volatility index, a measure of implied volatility, closed Tuesday at 14.55, down from its average of 21.32 since March 2009, when the stock market bottomed.

Investors have both lady luck and central bankers around the world to thank for this year's friction-less returns.

Dodging bullets

Russ Koesterich
Russ Koesterich

“We've dodged some bullets this year,” said Russ Koesterich, chief investment strategist at BlackRock (BLK) Inc. (BLK), New York. “We didn't have the repeated shocks there were over the last five years.”

During the past five years, there have been numerous worries about Europe and Congress.

Even though those worries haven't completely abated — there's more debt ceiling drama on deck — they have been overwhelmed by the unprecedented liquidity that central bankers are pumping into the global economy, said Kristina Hooper, U.S. investment strategist at Allianz Global Investors, New York.

“It's had an incredible calming effect on the markets,” she said of the fiscal stimulus.

The Federal Reserve Bank is expected to start cutting back on its asset purchases soon, though, possibly as early as later this month.

That could mean that volatility, or at least historically average volatility, is right around the corner, Mr. Koesterich said.

“Liquidity has gone a long way toward dampening volatility,” he said. “As that starts to fade, you're going to see a resumption of volatility. That doesn't mean going back to 2008 levels, but even a reversion to the mean is going to feel like high volatility given how low it's been this year.”

"Equities enjoy big rally with few shocks in 2013 but drama ahead" originally appeared on InvestmentNews, a sister publication of Pensions & Investments.