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By the Numbers: Is Market Volatility Abnormal This Year?

Key Takeaways:

  • [endif]The level of market volatility in 2017 was abnormally low.

  • Volatility has increased in 2018, but to a level that is closer to a historically typical year over the past quarter century.

  • Market volatility is likely to escalate as the bull market ages and the Fed normalizes interest rates.

One of the biggest market stories in 2018 has been the return of equity market volatility, which is in stark contrast to the environment investors witnessed last year. While equity volatility has seemingly risen, is this year’s market more volatile when compared to history? Vanguard founder and former CEO Jack Bogle stated the following in an April interview, “I have never seen a market this volatile to this extent in my career. Now that's only 66 years, so I shouldn't make too much about it, but you're right: I've seen two 50 percent declines, I've seen a 25 percent decline in one day and I've never seen anything like this before.” We feel that is a strong statement from Mr. Bogle. Volatility is certainly high relative to 2017, but in our research, it appears to be closer to historical norms as opposed to being dramatically higher as it was in 2000 or 2008. Volatility is measured in different ways, but we will keep it simple and concentrate on performance, drawdowns, and return dispersion.

First, let’s analyze the 2017 data. Last year, the S&P 500 posted a gain of 21.8% for the year, but did not experience a drawdown that exceeded 3%. A drawdown is the percentage loss from the peak to trough during a market decline. What we view as more exceptional is that 2017 was the first year on record where the S&P 500 posted a positive total return in all 12 months of the year. The total number of 1% down days in the entire year was only four, far below the average of 31 per calendar year since 1990. Moreover, the average daily trading range was also tight, with an average range of only 0.5%, compared to an average of 1.3% since 1990.

Source: Cetera Investment Management, Yahoo Finance. Data as of 5/2/2018

Turning to this year, equities continued to rise during the early part of 2018 as stocks reached an all-time high on January 26. The S&P 500 went a record 311 trading days without a 3% drawdown and a record 404 trading days without a 5% drawdown. Both of these streaks were broken as the S&P 500 went through its first correction in two years before bottoming in early February, when stocks fell by 10% from the late January peak. To put this in perspective, the S&P 500 experiences a 3% drawdown every 32 market days, on average.

Other risk metrics have ramped up in 2018, including a wider dispersion in daily returns. The total number of 1% or more daily declines spiked to 14 this year from only four last year, while 2% or more daily declines have happened seven times this year, the most since 2011. The S&P 500 did not have a 2% daily decline in all of last year. Additionally, the average daily trading range has climbed to 1.4% this year and we have had 49 days with a daily trading range that exceeded 1%. We have seen an increase in strong positive days as well, with 17 days where gains were greater than 1%, pushing the total number of trading days in 2018 with a +/-1% move to 31 this year, up from only 8 in 2017. While the increase is notable when coming from a low base, these figures are closer to the historical norm for a calendar year over the past quarter century, as shown Table 1.


Source: Cetera Investment Management, Yahoo Finance, and JP Morgan. Data as of 5/2/2018

We also included 2008 data in Table 1, and should note that the market environment in 2018 does not come close to resembling the volatility experienced at the beginning of the world financial crisis. Rather, the market volatility in 2018 is typical, as compared to the average year since 1990, based on most risk metrics. Market dynamics could change over the upcoming months, but up to this point, 2018 has been a return to normality, following one of the least volatile periods in history.

The rise in volatility this year has more to do with an increase in uncertainty for equities as opposed to a rise in market risk. The market did not have to deal with a lot of uncertainty last year. Corporate earnings were rising sharply, inflation was subdued, interest rates were stable, economic growth was accelerating, and optimism for tax reform was elevated. As the market transitioned into 2018, the dynamics changed. This year, inflation has picked up, bond yields have risen sharply, there is anxiety over a potential trade war, and the Fed is signaling that interest rates might normalize quicker than the market anticipated.

Over time, volatility ebbs and flows during different market environments. The current bull market is over nine years old and the environment this year is more typical of what is experienced in more mature stages of a bull market. It is likely that market volatility will increase as the Fed normalizes interest rates and the bull market ages. During these times, it is important to maintain a well-diversified portfolio and avoid concentration risk. We recommend keeping equity and fixed income allocations close to the long-term targets, with exposure to alternative investments to help dampen portfolio volatility.

This report is created by Cetera Investment Management LLC

About Cetera® Investment Management

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The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping (among other factors) designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.


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