To say that the US stock market is on a roll is an understatement. The S&P 500 Index yesterday posted its sixth straight daily gain for the first time in over two decades, according to the Financial Times.
The positive trend extends well beyond recent history. Ranking the five-year performances for all the major asset classes, based on a set of proxies via exchange-traded products, reveals that US stocks continue to hold the top spot. Vanguard Total Stock Market (VTI) is currently sitting on a strong 14.4% annualized total return, as of yesterday (Oct. 5) – a hefty premium over the rest of the field. Although several corners of the global markets are posting solid gains for the trailing five-year window at the moment, the US equity market’s surge stands alone.
Finance theory tells us that the price tag for high returns is high risk, commonly defined as return volatility. But textbook wisdom has fallen on hard times lately. The last several years may or may not be an anomaly for equity risk, but for the moment it’s striking to see the stock market’s high performance is coupled with unusually low vol.
Equity vol in the US hasn’t just decreased over the past year – it’s collapsed! VTI’s rolling 90-day volatility (standard deviation) has dipped below 8% lately – a remarkably calm profile compared with the last several years.
VTI’s tranquil risk profile is striking in relative terms as well vs. the major asset classes. US equities are currently ranked as the fourth-lowest risk profile.
VTI’s serene risk profile also stands out based on drawdowns for the major asset classes. At the moment, the US stock market is at a record high, which is to say that equity drawdown is zero.
Trees don’t grow to the sky, of course, but in the current climate the bullish momentum for US stocks implies that the fun has room to run. Granted, every bear market begins at a market top so it’s never really clear if the party has ended by looking at the last print. But recession risk for the US remains low and Mr. Market’s in a party mood.
“Right now, it feels like the early stages of a melt-up,” says Ed Yardeni, who heads up the research firm Yardeni Research. But beware, he adds. “Melt ups are irrational. Too much of a good thing, too fast. It has to be followed by a meltdown.”