Barely a Peep
You may have noticed something unusual about the stock market this year: how little there has been to notice.
"Things that are mind-numbingly dull," tweeted CNNMoney columnist Paul La Monica yesterday. "Watching paint dry. Watching grass grow. Watching today's market moves."
He may be on to something. Last year, the Dow Jones Industrial Average (INDEX: ^DJI) closed up or down more than 1% 89 times. In 2008 and 2009, it bounced up or down more than 1% over 100 times. Yet so far this year, it's happened only a few times. If we continue the current pace, 2012 will finish with 21 days up or down more than 1%. That would be the 13th lowest since the 1920s:
Viewed another way, the Dow's average daily range (peak to trough) this year has averaged less than 1%. Since 1928, the average is 1.2%. Since 2000, it's been 1.6%.
Market volatility is way down, in other words. And not just down from the chaotic heights of the financial crisis, but also down below long-term averages.
What should you make of it? The short answer is, not much.
Three months doesn't a trend make, for one. This year's calm markets could -- and very likely will -- end before long, with big up and down days making a comeback.
That isn't a forecast of market direction, however. Market volatility is one of those things that tells us everything about what just happened but almost nothing about what's about to happen.
For as long as there have been investors, there have been attempts to predict where stocks are heading next. Despite an almost unblemished record of failure by both professional investors and academic researchers, it persists.
One common attempt at reading the tea leaves this year is pointing out that low volatility is a sign of investor complacency, which could usher in the rude awakening of a market correction or low returns.
This makes sense in theory, but there's little evidence that it's happening. Stock research firm Birinyi Associates once calculated S&P 500 returns one, two, three, and six months after the VIX Index (a measure of market volatility) broke 20% below and 20% above its 50-day moving average. The correlation, it found, was meager. The VIX "details, perhaps better than other measures, the volatility of the market today but not tomorrow or the day after," Birinyi wrote.
That chart up above confirms the point over longer periods. Market volatility was high in the early 1930s, and it was one of the best times in history to buy. It was also high in the late 1990s, which was quite literally one of the worst. Markets were calm in the mid-1960s, and subsequent returns were poor. They were also calm in the early 1990s, and subsequent returns were terrific. What the market does today has little bearing on where it will go tomorrow.
What is predictive of future returns, as we're so fond of pointing out, is buying good companies at good prices. I've highlighted companies such as Microsoft (NAS: MSFT) , Johnson & Johnson (NYS: JNJ) , and Dow Chemical (NYS: DOW) in previous articles. For a few other high-quality names, consider the Motley Fool's special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks."It's free.
At the time this article was published Fool contributorMorgan Houselowns shares of Microsoft and Johnson & Johnson. Follow him on Twitter, where he goes by@TMFHousel. The Motley Fool owns shares of Microsoft and Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Microsoft and Johnson & Johnson, creating a bull call spread position in Microsoft, and creating a diagonal call position in Johnson & Johnson. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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