Where's the Pullback? Stock Markets Defy History

Summary

WSJ Your Money Briefing
Episode Title: Where's the Pullback? Stock Markets Defy History
Date: July 20, 2017
Host: John Wardonk
Guest: Steven Rusolillo, WSJ Markets Reporter

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Episode Overview

In this episode, John Wardonk speaks with Steven Rusolillo about the remarkable performance of global stock markets in 2017. Markets in the U.S., Europe, and Asia have experienced a steady, almost uninterrupted rise, confounding historical patterns that typically include periodic corrections and pullbacks. Together, they explore the data, discuss possible reasons behind this trend, and consider what might lie ahead for investors.

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Key Discussion Points & Insights

Unprecedented Market Calm and Rising Charts

• Global market surge: Major indexes like the Dow, S&P 500, MSCI Europe, and MSCI Asia Pacific (excluding Japan) are all up for the year.

• Lack of volatility: There have been no 5% pullbacks in any of these regions—a statistical rarity over the past three decades.

• Autopilot markets: The typical “up and down” pattern is notably absent, with markets seeming to move in a straight line upward.

  “Markets have literally basically just gone straight up. There's been very little bumps along the way. It's really like the markets have been on autopilot.”
  — Steven Rusolillo (01:26)

The Search for a Pullback

• Absence of corrections: No 10% correction or even a modest dip has occurred—contrary to expectations.

• Nervous optimism: Investors and commentators alike are “scratching their heads,” aware that at some point, markets must drop, yet seeing little evidence of imminent danger.

  “A lot of people are looking at this and watching the markets and saying it has to go down at some point, right? Markets go up, markets go down.”
  — Steven Rusolillo (02:40)

Fundamentals Over Politics

• Central bank policies: Accommodative stances by central banks are supporting market gains.

• Strong earnings: Consistent and improving corporate earnings are fueling the rally.

• Economic growth: Growth is “slow but steady,” but strong enough to outweigh concerns about global politics and turmoil (i.e., U.S. political gridlock, Brexit).

  “Earnings, the economy, they have overshadowed any sort of political turmoil that we've seen around the world.”
  — Steven Rusolillo (03:45)

Low Volatility: What Does It Mean?

• Historical lows in volatility indexes: The VIX, known as the “fear gauge,” closed at one of its lowest levels since 1993.

• Impact on different investors: Professional traders who thrive on swings are struggling, but everyday retail investors are benefiting with strong portfolio gains and little stress.

  “If you are just, you’re regular, average Joe, individual retail investor, you know, you watch your 401k, you’re doing quite well this year... It hasn’t been volatile at all, actually.”
  — Steven Rusolillo (05:17)

Can the Rally Last? What’s Next?

• No recession in sight: The economic expansion is long, but no imminent downturn is expected by most observers.

• Cautious hope: While a correction is mathematically inevitable “at some point,” there are reasons to believe the rally could persist in the short term, especially with earnings momentum.

  “Volatility can be low for a lot longer than people anticipate. We saw this in the 90s… So, right now… there’s room to be hopeful that this rally could continue.”
  — Steven Rusolillo (06:08)

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Notable Quotes & Moments

• Superman Rally?

  “Can we call this a Superman rally? It's up, up and away.”
  — John Wardonk (03:00)

• Trademark moment:

  “We're going to be talking again sometime soon about this autopilot market.”
  — John Wardonk (06:30)
  “I like that you coined that.”
  — Steven Rusolillo (06:40)

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Timestamps for Major Segments

• 00:41 – Introduction of guest Steven Rusolillo and discussion opener
• 01:02 – Recap of strong, nearly uninterrupted market gains
• 02:05 – Statistical rarity of 2017’s lack of corrections across global benchmarks
• 03:06 – Can current trends continue? Factors supporting and risks against the rally
• 04:49 – Discussion about low volatility, impact on traders versus long-term investors
• 06:08 – Historical context and speculation about what could come next

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Summary

This episode unpacks how the stock markets in 2017 have defied historical norms by rising steadily without the typical setbacks or corrections. Steven Rusolillo explains that robust fundamentals and supportive central bank policies are outweighing political uncertainty. The ultra-low volatility environment has made it a banner year for individual investors but a dull one for traders who thrive on unpredictability. Looking to the future, the consensus is that, while a downturn will eventually come, there are still solid grounds for optimism as earnings grow and economies improve. The show wraps with lighthearted banter on trademarking the “autopilot market” phrase, underscoring just how unique this period feels to seasoned market observers.

Transcript

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Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

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See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

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[Small Business Owner]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition. This is yous Money Matters from the Wall Street Journal.

[John Wardonk]

I'm John Wardonk at the Wall Street Journal. Stock markets go up and down. It is a fact of Life. Except in 2017. Who wrote that? None other than Steven Rusolillo who covers the markets for the Wall Street Journal. And he joins us now. Very clever line there, Step. Very true this year.

[Steven Rusolillo]

Yeah, thanks so much for having me. So it's been 2017 has really been the year of the steady, gradual rise in the markets. And so actually you should probably take away rise because we've seen a really sharp move in some markets. If you look at tech stocks and whatnot. But specifically, if you look just in the U.S. dow S&P 500 up about 10%. In Europe, you've seen similar gains. In Asia, you've seen even better gains. But what really stands out about the moves that we've seen this year is the fact that if you look at these charts, markets have literally basically just gone straight up. There's been very little bumps along the way. It's really like the markets have been on autopilot. And so that has really been what, that's what's been so shocking about what we've seen a little bit into the second half year of 2017.

[John Wardonk]

Obviously, no correction, no 10% correction here. No major sell offs. I mean, no hiccups, it seems, and no pullbacks, as you mentioned. Autopilot, it seems.

[Steven Rusolillo]

Yeah. So let's go through the stats a little bit. If you look at U.S. asia and Europe, those three as measured by the S&P 500, MSCI Europe and MSCI Asia Pacific, excluding Japan. So we'll use those three benchmarks. Okay. None of them have had a 5% pullback this year. Now, that has never happened in at least the past three decades. Okay, so what does that mean? That means that somewhere along the line, either one of those regions or two or all three, they go down for a little bit and then they come back. And that's the typical course, that's the typical trajectory. But we haven't had that at all so far. And so that's really what is kind of startling to some people because a lot of people are looking at this and watching the markets and saying it has to go down at some point. Right? Markets go up, markets go down. That's what happens. And so people are nervously watching this, watch this unfold.

[John Wardonk]

Can we call this a Superman rally? It's up, up and away.

[Steven Rusolillo]

So that's what's happening now. Can it continue? Sure, of course it can continue. Can it go down? Of course it can go down as well. I mean, that is not the most insightful piece of analysis, but that's really where we sit right now. I mean, it's at some point, if the market does go down, you're going to see people say, oh, of course, this was long overdue mathematically, markets have to go down by this point. But the flip side of that is you still see central banks that are very, by and large, they're very accommodative right now. You see earnings growth that is really strong across the world right now. And you see economic growth that is slow but steady and actually improving in most areas. So, so a lot of people say, well, hold on, well, what about politics? What about there's so much turmoil in the US There's Brexit, what about that? And at least for now, what we've seen in markets is that earnings, the economy, they have overshadowed any sort of political turmoil that we've seen around the world.

[John Wardonk]

We're talking with Steven Rusolillo. He covers the markets for the Wall Street Journal. And this is yous Money Matters from the Wall Street Journal. Thanks everyone for listening. Steve. We should let everyone know you're joining us from Hong Kong via Skype. And when you look at the major averages on Wall Street, Dow up more than 9% so far this year. As we're chatting, NASDAQ up more than 18%. I did a triple take looking at the NASDAQ composite year to date, number what? And then the S and p up some 10%. From your view there in Hong Kong, what do you make of all this? Are you scratching your head every day? Are others you talk to scratching their heads?

[Steven Rusolillo]

Yeah. So a lot of this gets back to the historically low volatility environment that we've heard so much about over the past several weeks, several months, really. So if you look at the vix, which is the volatility indicator that a lot of people like to cite, the so called fear gauge that closed at one of its lowest levels ever over the past few days is below 10. It's at its lowest since 1993. It's just showing how calm things are. And so there's two ways to look at this. One is that if you are a professional trader who makes a living trading on volatility and really does well when markets are swinging up and down, you're not doing so well. But if you are just, you're regular, average Joe, individual retail investor, you know, you watch your 401k, you're doing quite well this year. It's been a really spectacular year. And it's been a year that hasn't really been so volatile. It hasn't been volatile at all, actually. And so the question, of course, is, what happens next? You know, volatility can be low for a lot longer than people anticipate. We saw this in the 90s, especially in the mid-90s. You saw it actually in the mid to early to mid 2000s, after the tech bubble and before the financial crisis. So, you know, right now, at this very moment in time, very few people are predicting a recession that is imminent. Obviously, we're in a very long economic expansion right now. So a recession will happen at some point, but in the very, very short term, almost nobody is predicting one to happen immediately. So in that environment, and with earnings doing well and getting even better as we speak, there's room to be hopeful that this rally could continue.

[John Wardonk]

He's Stephen Rusolillo. He covers the markets for the Wall. Steve, I'm sure we're going to be talking again sometime soon about this autopilot market.

[Steven Rusolillo]

I like that you coined that.

[Advocate for Durbin Marshall Bill]

I like that.

[John Wardonk]

Let me get a little trademark registration. Thanks, Steve, as always.

[Steven Rusolillo]

Great. Thank you.

[John Wardonk]

And I'm John Wardonk and this has been youn Money Matters from the Wall Street Journal.

[Small Business Owner]

The Wall Street Journal. Listen. Ambitiously, access to affordable credit helps me pay my employees, but I don't really need it.

[Advocate for Durbin Marshall Bill]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Advocate for Durbin Marshall Bill]

they need while increasing megastore profits. They deserve it, don't they?

[Small Business Owner]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.