U.S. stocks are headed for their calmest stretch since 2007, by one measure. What that means for your portfolio.

By Joseph Adinolfi

History suggests the market could continue to climb, despite signs of complacency and mounting risks

An unusually tranquil stretch for U.S. stocks is poised for a new milestone on Wednesday just as the rally appears to finally be broadening out beyond a handful of megacap names.

Assuming stocks avoid an outsize selloff, the S&P 500 index SPX is on track for what would be its 352nd straight session without a 2% decline, the longest such streak since February 2007, Dow Jones Market Data show.

When confronted with data points like this, many investors' first instinct is to brace for a pullback, said Todd Sohn, ETF and technical strategist at Strategas, during an interview with MarketWatch. But the data suggest that periods of market calm can persist for far longer than one might expect.

Over the past 50 years, there have been four episodes where the S&P 500 went even longer without a 2% daily pullback, according to Dow Jones Market Data, the longest being a 1,044-day stretch that ended in October 1979.

   Length of Streak in Trading Days  Start of Streak  End of Streak 
   351 *active*                      02/22/2023       07/16/2024 
   351                               09/12/2016       02/01/2018 
   949                               05/20/2003       02/26/2007 
   526                               02/07/1994       03/07/1996 
   246                               02/17/1993       02/03/1994 
   314                               11/18/1991       02/12/1993 
   216                               10/10/1990       08/16/1991 
   746                               01/25/1983       01/07/1986 
   1044                              08/21/1975       10/08/1979 

Source: Dow Jones Market Data

The lesson here is that while investors can work themselves into a tizzy worrying about threats to their portfolios lurking around every corner, over time, more money is lost by staying on the sidelines in anticipation of a selloff than during the selloff itself, Sohn added.

"In and of itself, it isn't really something to worry about," Sohn said about the perception that the market might be overdue for a selloff. "Have it on your mind, but don't let it derail your investment thesis."

After all, the rally has showed few signs of slowing down lately, even as new and unexpected risks have emerged over the past few days, said Paul Hickey, an analyst at Bespoke Investment Group.

In a sense, the market's resilience has been pretty remarkable. A leading U.S. presidential candidate was nearly assassinated on Saturday, and on Thursday, a cooler-than-expected U.S. inflation reading prompted traders to dump the market's winners in favor of its laggards.

Yet indexes like the S&P 500 have continued to climb further into record territory, even without the help of Nvidia Corp. (NVDA), the artificial-intelligence darling deemed by some to be the market's indispensable stock.

"You have a situation right now where the Democratic candidate's own party doesn't want him to run for president and a Republican candidate who was almost assassinated, and the Vix is at, like, 13," Hickey said. "In that respect, it is incredible that volatility is so low."

Hickey is referencing the Cboe Volatility Index VIX, otherwise known as the Vix, or the market's "fear guage," which has remained near its lowest level since before the COVID-19 pandemic. It hasn't finished above 20 - a level roughly consistent with its long-term average - since shortly after the collapse of Silicon Valley Bank last year.

The 178-day streak was, as of Tuesday's close, the longest since early 2018, FactSet data show.

A low Vix suggests the rally is on solid footing, but it could also signal that investors might be growing complacent, just as stocks enter what has historically been their weakest three-month stretch of the year from mid-July to mid-October, Hickey said.

To be sure, just because stocks haven't seen a 2% drop in a single day doesn't mean there haven't been pullbacks. The S&P 500 endured a 10% correction that ended in late October, along with a roughly 5% pullback in April, Hickey pointed out.

And as the fall approaches, the market is facing a trifecta of risks which threaten to knock it off course. Professionals in the asset-management industry who spoke with MarketWatch said they are keeping an eye on U.S. politics, signs of a cooling economy and the potential for corporate earnings to leave investors disappointed.

Many on Wall Street, including stock-market experts at Citigroup Inc. and Goldman Sachs Group Inc. have warned about the potential for a selloff in the coming weeks.

See: Stocks are headed for a 'summer squall,' Citi warns

According to them, the market has simply moved too far, too fast. Rich valuations for some stocks could leave the market vulnerable to a bout of volatility.

But a rapid comeback over the past week in corners of the market that have lagged behind the S&P 500 and Nasdaq Composite - most notably the Russell 2000 RUT, which capped off one of its strongest five-day stretches in history on Tuesday - is inspiring hope that a rotation toward value stocks, cyclical sectors like financials and interest-rate sensitive areas like real estate could power the next leg of the rally.

The big question is whether this rotation will happen at the expense of the megacap stocks responsible for most of this year's gains. On Thursday, stocks like Nvidia tanked, dragging the S&P 500 lower even as roughly 80% of its members finished higher.

"I think the market can continue rising even if tech goes nowhere. But I don't think it can continue if tech collapses," said Mike Dickson, head of research and product development at Horizon Investments.

Both the S&P 500 and Dow Jones Industrial Average DJIA finished at a record high on Tuesday following the Dow's biggest advance of 2024. The Nasdaq Composite COMP saw a more modest advance, but still managed to log its second-highest close in history, Dow Jones data show.

-Joseph Adinolfi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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07-17-24 0750ET

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