On March 14, 2017
The Decline of Market Volatility
Where is the volatility? If I asked you to give me a list of what’s happening in the news, I would bet three out of five headlines you give me will be negative events. This can mostly be explained by negativity bias, but even so, why isn’t this affecting the markets? We are witnessing the least volatile period in the last 37 years. This is impacting things like active managers’ ability to generate alpha, to the premiums available in the options market. It may also be giving us a false sense of security.
To learn more about normal price volatility, I gathered the S&P 500’s intraday prices going back to 1980, then calculated the percentage change from the lowest to highest intraday price. My findings show that on an average market day we should see a change of 1.33%. The average for the past year has only been 0.77%. Since President Trump’s election we’ve averaged even less, 0.60%. This is highly irregular for anytime, but especially in the time following an election. Average intermarket percentage change in the following three months after an election is 1.41%, and if we only look at elections were we switched parties, the average is 1.88%.
The oddities don’t stop there. As of 2/24/2017, we have gone 48 days without at least a 1% intraday price change. This has never happen in the last 37 years. If we look at the chart below, only five times have we ever had 30 days or more, and only once (right now) have we gone over 45 days.
Will this market complacency stick around? It’s possible, but highly unlikely, in our opinion. We expect an increase in market volatility over the next two years to be more in line with the 3- and 5-year average (Both 0.96%). With that in mind, we strive to anticipate the volatility rather than simply react to it. We believe diversification is one of the great ways to get portfolios ready. We avoid anchoring portfolios to past performers. Human biases make it easy for us to want to sell off losing assets classes/sectors while simultaneously doubling down on past performers. Instead, we focus on diversification and being mindful when others are complacent. The subtle ebbs and flows of this current climate will eventually vanish, and when they do, remember the cover of Hitchhiker’s Guide to the Galaxy. Don’t Panic.
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.