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
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.
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.
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 welldiversified
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
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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