Equity markets in the US and Europe have been range bound since May. A range bound market is one where the price stays between specific high and low points over a sustained period, effectively the market is bound within a short range of up and down moves. This is a technical way of saying that markets have been pretty quiet for the past two months, with no major moves either up or down.
Volatility (as measured by the VIX Index) shows a similar story. The VIX has remained below 20 since May, including the mild spike up in volatility we saw last week, and on average remains well below the average level seen since the beginning of 2020. This period of calm has coincided with slow news-flow in financial markets. The vaccine roll-out and economic reopening has broadly continued, covid variant driven hiccups notwithstanding.
We also typically see seasonally lower trading volumes in markets during the summer, which in this case may simply be making an already quiet market even quieter.
History tells us you should never sell a quiet market. Periods like this have typically preceded strong moves up. We are also continuing to see evidence that corporate earnings will be strong for the periods Q2 2021 (reporting starts next week) and Q3 2021 (reporting starts in October). Strong corporate profit growth in flat markets effectively makes markets cheaper, as you’re getting more corporate profits for the same price (as an equity investor, what you own is the future stream of cash flows that your chosen investments produce). This is not a bad thing for equity investors.
This period can be best thought of as a market consolidation, and in an environment of continued cyclical economic recovery and high growth in corporate profits, this is not a market investors should be selling.
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