April 15, 2020
Assessing market volatility
In the last quarter of 2018, the market was down 20% from previous highs and we had many clients reaching out concerned about declines and high volatility. But when we examined the market’s movements, we found the volatility to be higher than normal but far from extraordinary. Recently, we have gotten similar questions from clients again on returns and volatility. Here we examine historical daily price movements of the S&P 500 to try and see if the market has really been crazy or if people are overreacting.
The average daily price movement in the last 30 trading days of the quarter was 4.10%. In terms of 30-day stretches, this is the third most volatile period in history, behind the 4.41% seen on November 15, 1929 and the 4.13% on November 21, 2008. In terms of acute volatility, what we’ve recently seen is not unprecedented, but we’ve never seen anything much higher.
If you look at the entire quarter, which had 62 trading days, the average daily movement was 2.28% which is the eighth most volatile quarter on record. The greatest quarterly volatility was at the end of 2008 (3.34%), and the other six were between 1929 and 1933. Three of those came in 1932 when the average daily movement for the year was 2.59%!
These are only a few ways of looking at volatility, but regardless of how we measure it, the recent volatility in the stock market is very high and very unusual. However, it is important to remember that volatility can be brief. On Friday October 16, 1987 the market dropped 5.2%. The following Monday it dropped 20.5%. The Monday after that it dropped 8.3%. Despite this unprecedented volatility and huge daily drops, the market finished 1987 up 5.3%.
We don’t know how long this type of volatility will last, but we know enduring it is worth it. Investors earn years like 2017 (+21.8%) and 2019 (+31.5%) by sticking it out during times like this.