During the second quarter of 2015, our market stress indicator remained consistently in the offensive portfolio state. All U.S. equity indices traded within a historically narrow range and ended the quarter essentially flat. In fact, the narrow S&P 500 range in the first six months of 2015 placed the period in the lowest decile of all 6-month periods ranked by trading range going back to 1953. Such a narrow range is rare, but not predictive of future returns. In the middle 1990s the S&P 500 broke out of its narrow range to resume the strong bull market trend of that decade, but in 2007 the range breakout occurred to the downside with the global financial crisis. What is clear is that periods of such low volatility are anomalous and not representative of the normal state of the equity market.
The first half of 2015 was also notable when ranked on the basis of percent up days. The chart below shows the S&P 500 returns in all six-month periods since 1953, grouped into deciles on the basis of the portion of days in the period with positive S&P 500 returns. The relationship shown makes intuitive sense: those periods with fewer positive S&P 500 days are more likely to have had worse total return than those with more positive return days. The January to June 2015 period is notable because, on the basis of percent up days, it ranked in the second worst decile (marked in purple).
Nearly every period in that decile going back to 1953 had a negative S&P 500 return, and the median return in that decile is -4.7%. The first half of 2015 was one of the very few 6-month periods of the past 60 years having such a low percentage of up days, and still delivering a positive return for the S&P 500: +0.20%.
By any measure, the S&P 500 and other U.S. equity indices continue to trade within a remarkably tight range. It remains to be seen which direction equities will break when the trading range normalizes. Our indicator system monitors equity market stress on a daily basis, and when economic indicators are uncertain, as they are now, the downside protection it affords can be especially valuable.
As of this writing, the second quarter earnings season is in full swing. Factset’s July 24th Earnings Insight predicts that when all S&P 500 companies have reported for the April to June quarter, the results will show blended revenue and earnings declines of 4.0% and 2.2% respectively, relative to the second quarter of 2014. Given such performance, the stable condition of equity markets remains surprising. In the past two quarters, revenue and earnings declines were limited to the energy sector. However in the second quarter, according to Factset’s predictions, utilities and materials also experienced revenue and earnings declines. Furthermore, blended S&P 500 revenues are expected to continue declining through the end of 2015.
As you know, we monitor market and economic circumstances regularly to confirm that our products are performing as designed. We believe it’s when economic indicators are uncertain, as they are now, that the downside protection afforded by our approach can be especially valuable.