A quick glance at financial news lately will undoubtedly alert a reader that the stock market has indeed become more volatile lately. While there are countless ways to measure stock market volatility, one relatively simple method is to calculate the average daily change (absolute value) of a given index over a trailing period such as the preceding 50 trading days. Figure 1 displayed nearby plots this metric for U.S. stocks, as measured by the S&P 500 Index, since 1950.
Last week, on April 2 the average daily move in the market over the preceding 50 trading days topped 1% for the first time since 2016. One way to interpret this figure is that on average, over the last 2+ months, the market has moved up or down by 1% a day.
By this measure, volatility is actually somewhat elevated relative to history. As of the end of last week, on April 6 the average daily move over the prior 50 trading days was 1.1% which put the current reading in the 92nd percentile of all observations dating back to 1950. Put differently, only 8% of the time over the last nearly 70 years have been higher according to this specific metric.
The current bout of volatility may feel even more extreme given that it comes on the heels of the period of relative tranquility we experienced in 2017. Last year, as discussed in previous commentaries, the S&P 500 moved up or down by 1% or more on only eight occasions and not once did it go up or down by 2% or more. In fact, the 50-day rolling average daily move on the S&P 500 Index dipped all the way down to a multi-decade low of just 0.22% in November of last year which was only incrementally higher than the all-time low reading of 0.18% which occurred more than a half-century ago in March 1964.
Given all of this, it’s entirely natural that some investors may be feeling a bit on edge or unnerved by the recent pick up in volatility. For those concerned investors, we think it’s valuable to keep in mind the following three key takeaways:
- Volatility is a normal part of investing and the market regularly experiences periods of both low and high volatility as volatility itself is dynamic.
- Volatility “spikes” are relatively common occurrences and don’t in and of themselves portend further market declines. Figure 2, presented nearby highlights that during the current bull market, since the market lows in March 2009, we’ve already experienced several bouts of volatility where the 50-day average daily move figure has approached or exceeded 1%. Each of these instances ultimately saw volatility subside and the bull market continue.
- Volatility can still go higher. We don’t know where either the market or volatility will go from here; however, we nonetheless think it’s instructive to recognize that volatility has been higher in the past and is likely to be at some point again in the future. As can be seen in both Figures 1 and 2, the rolling 50-day average move figure has reached as high as 4% during the recent Global Financial Crisis and has been in the 1.5-2.0% range on multiple occasions over the years.
For investors who have found the last few weeks unnerving, please don’t hesitate to write us or give us a call so that we can talk more about your specific concerns and how the recent volatility affects your unique financial goals and objectives.
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