Is the Stock Market Just Quiet or Is It Too Quiet?

Key Points

  • A quiet market characterized by low volatility and trading volume has prompted some worries that stocks are vulnerable to a sharp pullback on any piece of bad news.

  • History shows that lower trading volumes have not been bad news for stocks, with all the gains since 2008 having come on lower-volume days.

  • For the past 15 years, stocks most often posted further gains, after extremely low levels on the volatility index.

With the MSCI World Index representing stocks from around the globe steadily making new all-time highs, investors may be unsure if the stock market is just quiet, or too quiet. Some see a rising stock market combined with low market volatility and low trading volume as a sign something is not right. They worry that these conditions reflect a complacent market with low conviction from buyers, which may make stocks vulnerable to a sharp pullback on any piece of bad news. Although this may sound compelling, history makes a different case; periods of low volatility and low volume tend to precede further gains, not sharp declines. Of course, past performance is no guarantee of future performance, but it can inform decision making.

Lower volumes, higher stocks

Only seven days this year have seen trading volume above the post-2008 average for the stocks that make up the MSCI World Index. The trend has been downward, with 60% of days this year below the 50-day moving average of trading volume for world stock markets.

A common criticism of this bull market is that the low volume shows that buyers do not have a lot of conviction. The implication is, if volume does not pick up, the market may decline. However, the past eight years show the opposite: the stock market climbs on relatively quiet trading for long stretches of time and then briefly pulls back when volume jumps. In fact, all the gains for the stock market have come on lower-volume days since the start of 2009, as you can see in the chart below. On days when stock trading volume was below the 50-day moving average, stocks have generally gone up. Conversely, when volume was above average, stocks have been relatively flat.

All the bull market gains have come on lower-volume days

Cumulative daily performance for MSCI World Index when daily trading volume of stocks in index is above or below the 50-day moving average.
Source: Charles Schwab, Bloomberg data as of 5/10/2017.

Those investors worried about low trading volumes as a sign of an impending decline can take some comfort from the steady gains that have accompanied lower trading volumes.

Low and slow volatility

The stock market’s outlook volatility, measured in the United States by the Chicago Board Options Exchange Volatility Index, or VIX, is trending lower everywhere: the volatility indexes for the U.S., Europe, and Japan are near all-time lows. Some see this as a sign of complacency—a market expecting the best and unprepared for any bad news.

Volatility indexes at or near all-time lows

Source: Charles Schwab, Bloomberg data as of 5/11/2017.

Upward spikes in volatility that accompany sharp stock market sell-offs are most often followed by market rebounds. Declines in volatility that accompany steady gains in the market tend to unfold slowly, last for some time, and are most often followed by further market gains, as you can see in the tables below. These periods measure stock market performance in the United States, Europe, and Japan after the volatility index dropped to extraordinarily low levels like those seen recently (10 for the US and 14.5 for Europe and Japan).

Performance of MSCI World Index following volatility indexes dropping to extreme lows

VIX = S&P 500 volatility index, VSTOXX = Euro STOXX 50 Volatility Index, and VNKY = Nikkei Stock Average Volatility Index.
Past performance is no guarantee of future results.
Source: Charles Schwab, Bloomberg and Factset data as of 5/11/2017.

Periods of extremely low volatility index readings were very rare over the past 15 years, taking place mostly in 2005-06 and again more recently, so drawing hard conclusions from this data about what will happen in the coming months isn’t possible. Instead, the key takeaway for investors is that even when volatility was extremely low, losses in the months ahead were not assured. In fact, stocks most often posted further gains during the following one, three, and six month periods.

Quiet, not too quiet

Like a character in a classic western warily uttering the phrase “It’s quiet, too quiet,” it is natural for investors to view an unusually quiet market with suspicion. Although the market faces risks, low volume and volatility are not among them. Investors should remain committed to their long-term asset allocation to global stocks.

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Important Disclosures