How long can the stock markets’ eerie calm last?

Stock markets just keep rising higher to new records. Meanwhile, volatility (the amount of bouncing around stocks do) is at pre-crisis levels, with US equities especially becalmed.

The S&P 500 has moved by less than 1% a day for around 50 trading days, the longest streak in 20 years. We’re not the only ones who have highlighted the mismatch between tepid fundamentals and robust equities. Today’s conditions bear “a worrying resemblance” to 2007, says The Economist.

The Bank for International Settlements (‘the central banks’s central bank’, as it’s known) says that “euphoric” markets are detached from reality.

But there is little to suggest an imminent correction in America, which sets the tone for everywhere else, says John Authers in the Financial Times.

One sign a correction is due is a big surge, such as the run-up in the late 1990s. But this rally has been “controlled and methodical” rather than “obviously unsustainable”, says Jim Paulsen of Wells Capital.

Another red flag is that some sectors are becoming far more expensive than others, such as tech in the 1990s: corrections in 1987 and 1994 also happened in such circumstances. Yet today, “relative valuations are under control”, says Authers. Sentiment indicators aren’t flashing red yet either.

Journalists are still “writing articles about corrections” and the rally “continues to be distrusted”. And while merger activity has picked up strongly, it hasn’t quite reached the exuberant levels that suggest executives are “taking strong valuations for granted”.

So, don’t expect a significant correction just yet.

Merryn

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