Raise your hand if you think 2018—with its whipsawing days of 500 plus point Dow moves—was evidence that markets are more volatile than ever before. During the last 12 months, the S&P closed above 2,900 for the first time ever but starting in October downdrafts seemed like a daily occurrence. Indeed, 50% of the ten biggest single day gains and declines for the Dow Jones Industrial Average happened in 2018. Everything from Brexit to the trade war tweets to oil prices seemed to spark oversized moves in the stock market.
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But research from Newton, Mass-based money manager Adviser Investments ($5 billion in assets) indicates that this so-called new volatility isn’t as abnormal as the headlines would lead you to believe.
“This year is just a return to normal,” says Jeff DeMaso, Adviser Investments' director of research. “It feels so distressing for investors because last year was a super smooth ride.”
In other words, it’s not that 2018 has been unusually volatile, it’s that 2017 was unusually calm. The shock for investors this year wasn’t abnormal volatility, it was the shock of returning to the status quo. It also hasn’t helped that much of the volatility this year has been on down days, compared to the relatively tranquil bull market run of 2017.
According to DeMaso’s research, the long-term average of the S&P’s standard deviation is 15.6%. The standard deviation of the S&P 500 index in 2017 was just 6.7%: the second lowest year on record, after 1963. And the standard deviation in 2018 so far? 15.8%—totally average, says DeMaso.
Take one more metric: the average absolute change in price each day. In 2017, the S&P 500 moved up or down just 0.30% a day, on average. The average change in the long term is more than double this: 0.66%. 2018 has so far clocked in at 0.70% average change in price per day, well within the normal range.
Measuring the number of larger moves in the index produces leads to the same conclusion. DeMaso notes that in 2017, the S&P moved by 1% or more on just 9 trading days. In an average year, the S&P moves by 1% or more on 52 days. 2018 has seen 56 days where the market moved by 1% or more.
While volatility is certainly back after a remarkably calm 2017, 2018 has been not been substantially more volatile than an average year.
DeMaso says it’s important for investors to remember that markets rise and fall—both moves are normal. “The drawdowns are always scary, but we build portfolios knowing that they're going to come,” he says.
