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Weekly eLetter 12/7/2018 – Excessive Volatility?

Every now and then it seems to me that Mr. Market can be a reactionary beast — one who is looking for any excuse to launch into yet another bad hair day. So far, this week has produced three.

Today’s catalyst (at least as of this writing) is the latest nonfarm payrolls report (NFP) which came in about thirty-four thousand lower than forecast. That would be bad news, but one should note that this is likely a calendar influenced event. Last month’s number came in at more than 50 thousand OVER forecasts. So, the 2-month average is still higher than was forecast for the period.  Go figure.

We’ve talked recently a fair amount about volatility in the markets. Regular readers of this newsletter are aware that the VIX has been a front burner item in recent weeks. Some have asked if the recent level of volatility is truly wild and crazy or does it just seem that way? (Particularly in light of 2017 being a very calm year). For the answer we turn to the good folks at Dorsey Wright Associates ( They have pulled up the data and the short answer is ‘not really wild at all’. From DWA:

“… thus far in 2018 (through 12/5), there have been 56 days in which the S&P 500 SPX moved at least +/- 1%, which is seven times the amount of such moves we saw during the tranquil times of 2017. However, we need only look back to 2015 to find a year in which we had more +/- 1% days – in that year the market recorded 72 such days. With only 17 trading days remaining in the year (including 12/6), SPX would have to move at least 1% every day until the end of the year to exceed that mark.

However, just looking at the number of days in which the market moved more than 1%, doesn’t necessarily give us a complete picture of overall volatility – just this week we had a day (12/4) when the S&P 500 was down 3.24%. So, could we have a market that is having an abnormally high number of larger moves? Not really. Thus far in 2018, there have been 15 days when the market changed at least +/- 2% and five days when it moved at least 3%. And while each of these moves outpace the mark set in 2015 (10 2% days and three 3% days), we still need only go back to 2011 to find a year that exceeded these numbers. In 2011, the S&P 500 had 96 +/- 1% days, 35 +/- 2% days, and 12 +/- 3% days. Meanwhile, each of the three years preceding 2011 also recorded more 1%, 2%, and 3% days, than we have seen thus far in 2018.

Since 1928, on average SPX has moved more than 1% on 60.26 days each year, more than 2% on 16.76 days each year, and more than 3% on 6.58 days each year. So, while the recent volatility has been painful, from a historical perspective, the volatility in 2018 has been in-line with historical averages.

A few interesting data points:

  • 1932 had more 1% days, 2% days, and 3% days than any other year with counts of 181, 132, and 94 respectively.
  • 1964 was arguably the calmest year on record, having just three 1% days and no 2% or 3% days.
  • Since 1928, there have been 11 years, including 2017, that did not have a day where the S&P moved 2% or more.
  • There have 35 years in which the S&P 500 did not move 3% more. 

It is also worth noting that no days in 2018 fall into the largest one days of the S&P 500. SPX’s largest one-day gain in 2018 was 2.72% on March 26, there have been 1,040 larger single-day gains since 1928. On the flip side, the S&P’s largest single-day decline of 2018 was -4.10% on February 5th, ranking as the 414th largest one-day drop in the index’s history.”

DWA cautions that “Market volatility often pushes investors into making rash and untimely decisions.” Not only is that true, it actually exacerbates the situation by further enhancing the volatility. We hope cooler heads will prevail.

– Read more …