Is This Volatility Normal?

Recently, I was asked a question about stock market behavior: "For ten days straight, the S&P 500 daily range – meaning the session high minus the session low – has exceeded 1%. How unusual is this result?"

In this week’s Sight|Lines, we will cover some measures of stock market volatility, answer this question, and consider how these results help us better understand the market environment in 2019.

Measure #1 – The VIX

The CBOE Volatility Index, which is better known by its ticker symbol VIX, is a popular measure of expected stock market volatility. More specifically, the index is designed to measure a constant, 30-day expected volatility of the U.S. stock market, as implied by S&P 500 index options. The VIX is a popular measure with both the financial media and investors.

By the VIX, stock market volatility in 2019 has been normal by historical standards. But we see three spikes – early in the year, in May, and toward the end of July and into August. These relate to three topics – Federal Reserve (Fed) policy, trade uncertainty, and worries about a global economic slowdown.

Measure #2 – Daily Price Moves

While the VIX is a popular index designed to estimate future volatility, it’s also a bit of a black box, meaning we are asked to trust the model and the information embedded in the S&P 500 index options. So, a number of months back, my team and I developed a simpler question: How many days each year does the market move 1%, 2%, 3%, 4%, or more? By counting up these results, we can get a sense for the level of daily volatility experienced by investors each year. And, by this measure, 2019 has been a less volatile year. Volatility has increased recently, but not in an outsized manner.

Measure #3 – Standard Deviation

A traditional backward-looking volatility measure is standard deviation, which is designed to measure the width of a “bell curve” distribution. We cover this topic in detail in Trade, the Fed, and Stock Market Performance. By analyzing daily data each month, we can assess the implied annualized volatility of the market. By this measure, we see 2019 volatility higher in January and August.

A Different View – Directional Series

Volatility measures up and down movements. Are there times, though, when the market moves higher several days in a row? Repeated positive returns are good. But what about times when markets move down, day after day? Negative returns aren’t so good.

Consider the period from July 29 to August 5. The stock market was down six days in a row, driven by the market’s disappointment following Fed Chair Jerome Powell’s press conference and the disappointing trade meeting between the U.S. and China, followed by President Trump’s announcement of 10% tariffs. By our analysis, a six-day stretch of negative returns has happened 10 times over the last 20 years. So, a bit unusual.

Finally, back to the original question. When we look at the daily range, a stretch of ten days (or more) of intra-day swings of 1% or more has happened 57 times in the last 20 years. Combined, these occurred on 28% of the trading days, so not uncommon.

We find it helpful to conduct analysis and use industry metrics like the VIX to understand market behavior and results. In this case, the work confirms our view that the market will be susceptible to swings, both negative and positive, triggered by economic worries, geopolitical actions, and central bank policy. Volatility may calm down once issues like U.S.-China trade and uncertainty about Fed policy are resolved. And, of course, sustained economic growth should have a calming effect as well.

The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Employees of Stifel, Nicolaus & Company, Incorporated or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Past performance is no guarantee of future results. Indices are unmanaged, do not reflect fees or expenses, and you cannot invest directly in an index.

Asset allocation and diversification do not ensure a profit and may not protect against loss. There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries. Due to their narrow focus, sector-based investments typically exhibit greater volatility. Small company stocks are typically more volatile and carry additional risks, since smaller companies generally are not as well established as larger companies. Property values can fall due to environmental, economic, or other reasons, and changes in interest rates can negatively impact the performance of real estate companies. When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. The Standard & Poor’s 500 index is a capitalization-weighted index that is generally considered representative of the U.S. large capitalization market. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The DJIA was invented by Charles Dow back in 1896. The MSCI EAFE index (Europe, Australasia, and the Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada.

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