We Witnessing A Risky Build Up Of Investor Complacency In The Stock Market

The S&P 500 touched an all-time intraday high last week in what has been a remarkably low volatility rally with only very modest sell-offs.

"Little wonder," wrote Societe Generale's Andrew Lapthorne this morning. "The number of 1% down days for the S&P 500 in any given year has averaged 27 since 1969; the S&P 500 has seen just 16 1% down days over the last 12 months. It has now been 468 days since a market correction of 10% or more, the fourth longest period on record, and, as we show below, the annualised peak to trough loss has only been 5% compared to typical annual drawdown of 15%."

Sell-offs happen. And sometimes they're big.

"The point of all these figures is to illustrate a potentially risky build up of investor complacency," he continued. "The longer equities (and other risk assets) go without a typical period of losses, then the more these assets may be seen as one-way upward plays. Encouraging for new investors who may not have the capacity to absorb normal equity volatility and losses. Downplaying risk serves no one in the long term and we think policy makers should be more vocal about the potential downside."

Lapthorne charted the maximum annual drawdowns in the S&P since 1970. As you can see in the far right, volatility has been below normal.