December has historically been one of the strongest months of the year for equity markets. Taking a look over the past 20 years, the S&P 500 Index in December has averaged 2 percent.
This year has been extraordinarily turbulent, though. In fact, 2011 ranks “among the most volatile market years on record,” says Oppenheimer. When you look at the average absolute daily price changes of the S&P 500, you’ll see that the period from July through the middle of November averaged 1.8 percent. This is about a percent higher than the 60-year average, and just barely above 2008’s daily price changes. The fact is a little less significant when you consider that the 2008 number represents the entire year. Regardless, stock prices have been turbulent.
The S&P 500 isn’t the only index with extreme volatility, as stock markets around the world have been extremely correlated. Take a look at the chart below, which tracks the average two-year rolling correlation between the weekly price change of 23 different developed stock markets and the MSCI World Index. Stock price correlation has remained above 80 percent since 2009—the highest over the 25-year period. Gloom Boom & Doom Editor Marc Faber says that he can’t “recall in the forty years that I have been working in the investment business, equity markets which were this correlated.”
We believe that correlations will decrease along with volatility as we get more clarity on the eurozone crisis and see signs of stability in the global economy. Our investment team noted that volatility fell this week, with the CBOE Volatility Index (VIX) declining 20 percent. This could be related to the news that November U.S unemployment unexpectedly dropped to 8.6 percent, U.S. auto sales in November were the strongest in more than two years, and preliminary data on holiday retail sales appears to be strong. According to Bloomberg News, Black Friday sales hit a record high this year, with consumers spending $11.4 billion.
Oppenheimer is one bull on U.S. equities, as the firm believes that investors have overestimated the negative impact the crisis in Europe has on the U.S. economy and corporate profitability. Oppenheimer points to the fact that the U.S. is less reliant on Europe, with only 18 percent of U.S. exports heading across the Atlantic. This has fallen from 23 percent over the past two years. Meanwhile, U.S. export growth has averaged “double-digit year-over-year growth since the end of 2009,” says Oppenheimer.