BLBG: Fresh Records Get Stale With S&P 500 Volume at 6-Year Low
Lately, the higher the Standard & Poor’s 500 Index goes, the less investors care.
About 1.8 billion shares traded each day in S&P 500 companies last month, the fewest since 2008, according to data compiled by Bloomberg. When the gauge hit an all-time high on May 23, only about 20 of its 500 companies reached 52-week highs, the data show. That’s the lowest number in a year.
When volume and breadth wane even as stocks surge, it’s a warning sign that has preceded losses in the past, according to Sundial Capital Research Inc. in Blaine, Minnesota. Hayes Miller, who helps oversee $57 billion at Baring Asset Management Inc., says the skepticism shows investors distrust a rally built on Federal Reserve stimulus.
“Breadth is suggesting that the market is topping,” Miller, the Boston-based head of multi-asset allocation for Baring, said in a May 28 telephone interview. “This is not a good starting point for buying equities at this price. We all know that investors are induced into risk assets by central bank policies, which keep your safer options very unattractive.”
Exchange-traded and mutual funds that buy U.S. shares saw $1.2 billion in outflows this quarter, while bonds received $34 billion, data compiled by Bloomberg and the Investment Company Institute show. The gap is poised to be the largest since September 2012.
Stock Outflows
Individuals investing through the funds only started buying stocks in 2013 after the S&P 500 more than doubled from its 2009 low. They added more than $150 billion to funds last year after withdrawing $260 billion in the previous four, data compiled by ICI and Bloomberg show.
“Over the past couple of months we’ve seen an increase of flows out of stocks and back to bonds, which has been a surprise,” Cameron Hinds, the Lincoln, Nebraska-based regional chief investment officer for Wells Fargo Private Bank, which has about $170 billion under management, said in a May 29 phone interview. “We’ve also been surprised by the degree to which the yield on the 10-year Treasury note has drifted lower.”
The benchmark U.S. 10-year note saw its yield drop to 2.44 percent last week, the lowest in 11 months. The S&P 500, rose 2.1 percent to 1,923.57 last month, extending its gain since December to 4.1 percent. Futures on the U.S. stocks gauge were little changed at 9:06 a.m. in London today.
At an investor conference last week, Goldman Sachs Group Inc. President Gary Cohn blamed the reduction in trading on calm markets and the Fed’s efforts to hold down interest rates.
Falling Volatility
Volatility on the MSCI All-Country World Index, which tracks stocks in both developed and emerging markets, dropped to 5.33 on May 28, its lowest level since 1996, according to 30-day historical data compiled by Bloomberg. The Chicago Board Options Exchange’s Volatility Index, known as the VIX (VIX), closed below 12 for the five previous days, the longest streak since 2007. The measure has a five-year average of 19.9.
“What drives activity in our business is volatility,” Cohn said in New York on May 28. “If markets never move or don’t move, our clients really don’t need to transact.”
Citigroup Inc. Chief Financial Officer John Gerspach said last week that second-quarter trading revenue could fall as much as 25 percent from year-earlier levels, and JPMorgan Chase & Co. estimated a 20 percent drop.
John Traynor, chief investment officer of People’s United Bank Wealth Management in Bridgeport, Connecticut, finds improving economic growth and earnings more important than volume. His firm oversees $5.2 billion.
Economic Surprises
Citigroup’s U.S. Economic Surprise Index, which rises when data exceed forecasts, has gained 90 percent since reaching an almost two-year low on April 7. At the same time, about 74 percent of S&P 500 companies that have reported results this season beat analysts’ estimates for profit, while 53 percent exceeded sales projections, data compiled by Bloomberg show.
“Stocks are up because earnings are up,” Lawrence Creatura, a Rochester, New York-based fund manager at Federated Investors Inc., which oversees $376 billion, said in a May 28 interview. “And there’s no fundamental indication that the wheels are coming off.”
Laszlo Birinyi, the founder of Birinyi Associates Inc. and one of the first investors to buy when stocks were bottoming after the 2008 financial crisis, is also skeptical of the idea stocks valuations will falter amid low market breadth. Concern that the S&P 500’s recent records have not been accompanied by a large number of stocks reaching fresh 52-week highs is unwarranted, he wrote in a May 27 report.
Value Traded
Record prices may contribute to a drop in the number of shares changing hands because it takes more money to buy the same amount of stock. A daily average of $26 billion of S&P 500 companies were traded in May, down from $32 billion in April and about the same as last year, according to data compiled by Bloomberg.
Skepticism toward U.S. equities has extended from individuals to institutions. Global money managers raised cash holdings to a two-year high in May and said America is the worst place to invest, a Bank of America Corp. survey found last month.
With everyone pulling out, trading in S&P 500 stocks slipped to an average of 1.8 billion shares a day last month, the lowest since before the bull market began in March 2009. That compares with 2.7 billion a day in 2012.
