Synopsis: Keep Calm And Carry On
We analyze twenty five years of stock market data to determine that year-to-date 2018 stock market "volatility" – as defined by the frequency of a daily percentage move in the S&P 500 that is greater than +/-1% – is actually below recent history, both including and excluding the 2008-2009 financial crisis.
Background: Market Moving Sharply in Both Directions
Stocks have had a volatile 2 weeks to cap off a difficult start to Q4 2018. As written last week, there are lots of concerns rattling US stock markets, with all major indices off to their worst Q4 start since 2008. After every major US stock index dipped into correction territory last week (down over 10% from recent highs), stocks further retreated on Monday, only to sharply rally on the following three sessions from Tuesday through Thursday. While stocks are on-track to finish the week slightly higher across major indices, the chart below highlights the simple 1-day percent change for all three major indices in the US stock market since last Monday, or the past 10 trading sessions. For an instance where a major stock index finished >1% higher, we note the occurrence in green and for an occurrence where a major stock index finished more than <1% lower, we note in red.
In summary, over the past 10 trading sessions, the S&P 500 has closed +/-1% in 7 of 10 sessions (70%), while the Nasdaq has had 8 consecutive days of +/-1% moves (80%), and the Russell 2000 closed +/1% in 5 of 10 sessions (50%). While the absolute moves in major indices during this time period is fairly negligible (flat to down 2%) depending on the index you track most closely, the journey from point A to point B has been painful for many investors. Specifically, the upside realized volatility (markets sharply move higher) and downside realized volatility (markets sharply move lower) is certainly being noticed by both Wall Street and Main Street. We are seeing a significant increase in the frequency of terms such as "volatility", "market downturn", "stock market crash", "recession" in financial news articles that Milton reads every day. We touched upon this phenomenon during last week's post, when we analyzed Milton's database of a few million financial text documents.
User Question & Our Methodology
In light of recent market moves, a Milton user reached out and asked how recent current stock market "swings" compare to historical time periods, and we thought we'd take this opportunity to study this issue a little bit closer using data. While there are lots of ways to think about market volatility, we chose a simple measure of daily price movements as a way to measure realized volatility: specifically, the total number of instances where the S&P 500, the stock market's broadest barometer, moved higher by 1% or lower by 1% during every session over the past 25 years. This is an analysis using realized volatility, or actual historical price changes.
We know there are other commonly used volatility measurements, the most notable being the CBOE Volatility Index, or "VIX" index, that is often cited by financial news and media. But for a number of reasons, we do not believe the VIX is a good tool for this analysis since the VIX measures expected future volatility. In addition, the VIX index itself has idiosyncratic structural issues and well-documented challenges that make it less helpful when evaluating data over long historical time periods.
Chart of the Day: 2018 Volatility Below Past 25 Years
Using annual data going back twenty-five years, we compiled the following data. Specifically, the table below presents annual data highlighting the number of trading days per year, the number of trading days where the S&P 500 closed +1% or more on a given day, the number of trading days the S&P 500 closed lower by -1% or more on a given day, as well as showing these figures in percentage terms versus the total number of trading days in a given year. We also present summary statistics with the mean and median figures in blue at the bottom, both including and excluding the time period of the 2008-2009 financial crisis. 2018 is shown in yellow at the bottom, with year-to-date figures through today's close, and 2018 pro forma data extrapolating YTD market data for a full-year assuming 252 trading days. To make the table easy to read, we highlighted years where the S&P 500 had positive absolute returns in green and years where the S&P 500 had negative absolute returns in red.
- The percentage of trading days with a move of +/-1% is lower in 2018 than over the past 25 years, including and excluding the 2008-2009 financial crisis. To quantify, 2018 had had 22% of trading days with a move a of +/-1% in the S&P 500 versus a median of 28% over the past 25 years (23% excluding the crisis).
- The percentage of trading days with a move of +1% or greater and the percentage of trading days with a move of -1% or greater are both below the past 25 years. To quantify, 2018 has had 12% of trading days with a move of +1% in the S&P 500 versus a median of 14% over the past 25 years. Additionally, 2018 has 10% of trading days with a move of -1% or greater versus a median of 13% over the past 25 years. Both of these figures are also lower when excluding the time period of the financial crisis from 2008-2009.
- 2017 was an anomaly: it had the lowest number of +/-1% moves in the S&P 500 over the past 25 years by a wide margin (4% of trading days versus median of 28% across 25 years of data). Only 1995 was even remotely close, but even 1995 had nearly 2.5x the frequency of +/1% moves in the S&P 500 versus 2017.
- In every instance the market had a negative absolute return for a given year (highlighted in red in the table above), the number of trading days where the S&P 500 declined by -1% or more was >20% of all trading sessions in that year, versus approximately 10% of all trading days for YTD 2018.
Stock markets go up and down. While it might feel like recent volatility is substantially elevated, that is only true versus the past two years. Long-term data suggests year-to-date stock market oscillations are in-line with historical trends over the past 25 years.
If you have any questions or comments about financial markets or Milton in general, feel free to reach out directly to the Milton team at firstname.lastname@example.org or myself at email@example.com!
Apteo, the company behind Milton, is made up of curious data scientists, engineers, and financial analysts based in the Flatiron neighborhood in New York City. We have a passion for technology and investing, and we strongly believe that investing is one of the most reliable and effective ways to build long-term wealth. We build AI tools to help informed investors make better decisions.
Apteo, Inc. is not an investment advisor and makes no representation or recommendation regarding investment in any fund or investment vehicle.
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