Calm Before the Storm? What the Calm in U.S. Stocks Means for Your Portfolio

U.S. stocks are experiencing an unusually tranquil stretch poised to hit a new milestone on Wednesday as the rally expands beyond a few megacap names. If the S&P 500 avoids a significant selloff, it will mark 352 consecutive sessions without a 2% decline, the longest streak since February 2007.

ETF and technical strategist Todd Sohn from Strategas explained to MarketWatch that while many investors brace for a pullback, historical data shows that periods of market calm can last much longer than expected. Over the past 50 years, there have been four instances where the S&P 500 went even longer without a 2% drop, with the longest being a 1,044-day stretch ending in October 1979.

Sohn emphasized that excessive worrying about potential threats can lead to missed opportunities. Staying on the sidelines often results in greater losses than the selloffs themselves. “In and of itself, it isn’t really something to worry about,” he said, advising investors to remain focused on their long-term investment strategies.

Despite recent risks, the rally has shown remarkable resilience. Paul Hickey, an analyst at Bespoke Investment Group, noted that even significant events, like a near-assassination of a leading U.S. presidential candidate and unexpected inflation data, haven’t derailed the market’s upward trajectory. The S&P 500 continues to reach new highs, even without contributions from key stocks like Nvidia.

Hickey also pointed out the low volatility, with the Cboe Volatility Index (VIX) near its lowest levels since before the COVID-19 pandemic. A low VIX indicates a solid rally but also hints at potential investor complacency, especially as stocks enter their historically weakest three-month period from mid-July to mid-October.

While the S&P 500 hasn’t seen a 2% drop in a single day recently, there have been pullbacks, including a 10% correction ending in late October and a 5% drop in April. As fall approaches, the market faces risks from U.S. politics, a cooling economy, and potentially disappointing corporate earnings.

Wall Street experts, including those from Citigroup and Goldman Sachs, warn that the market might be due for a selloff due to rapid gains and high valuations. However, a recent rally in lagging market segments like the Russell 2000 is sparking optimism for a rotation toward value stocks and cyclical sectors, potentially driving the next phase of the rally.

The key question is whether this rotation will negatively impact the megacap stocks responsible for most of this year’s gains. Mike Dickson, head of research and product development at Horizon Investments, believes the market can continue rising even if tech stagnates, but not if it collapses.

Both the S&P 500 and Dow Jones Industrial Average reached record highs on Tuesday, with the Nasdaq Composite achieving its second-highest close in history.