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AAM Viewpoints – Volatility is Normal

About a year ago we wrote “The Decline of Market Volatility” commentary that highlighted the market calm in the wake of an election year. Volatility is back, and that means the market has returned to its normal behavior. Volatility isn’t a panic signal; we’re going to give you an update on just how odd 2017’s lack of volatility really was.

Let’s analyze the S&P 500’s daily price returns from 1968 to the end of 2017. Last year only had four trading days with a move of at least +/- 1%, making it the fewest in 50 years. All other years had at least 10 days with a +/- 1% move. As previously highlighted, 2017 went 53 days straight without an intraday market move of at least 1% (beating the previous record of 34 days);* and that’s the percentage change from the intraday low to intraday high – a far lower hurdle than having a 1% move at the close of the day. Looking at annual pullbacks, which we defined as the largest price retreat within each year, 2017 had the second lowest pullback in the last 50 years. Its largest drawdown was only -2.80%. 1995 was the only year with a lower pullback, clocking in at -2.53%. Also, these are the only two years (1995 & 2017) out of the last 50 to not have had at least a 5% pullback. If we look at the long-term averages shown in the table below, we can see 2018’s volatility is more of the norm than the exception. Low volatility is the anomaly, not volatility’s return.


Average Daily Price Moves of the Past 50 Years

Price movement

Greater

Lower

Total

Average total times a year (rounded)

+/- 1.0%

12.033%

11.202%

23.235%

58

+/- 1.5%

5.526%

5.415%

10.940%

28

+/- 2.0%

2.620%

2.565%

5.185%

13

+/- 2.5%

1.338%

1.330%

2.668%

7

+/- 3.0%

0.768%

0.736%

1.504%

4

+/- 5.0%

0.135%

0.166%

0.301%

1

+/- 7.5%

0.024%

0.047%

0.071%

0

+/- 10.0%

0.016%

0.008%

0.024%

0

Source: AAM, Bloomberg data | Period used 12/31/1967 – 12/31/2017 | Past performance is not indicative of future results.

Keep in mind that while the past is no predictor of the future, it is a great reference for context and perspective when facing a volatile market. Over the past 50 years, the S&P 500 has closed in positive territory 52.73% of the time; making the average daily price movement positivity skewed to 0.03%, with an average deviation of 71 basis points. Meaning most of the time the market closed between -0.68% and 0.74%, but a quick glance at the table above shows that bigger moves can and do occur. Actually, movements of +/-1% happened 23.24% of the time, which averages out to about 58 times a year. The average annual pullback of the past 50 years is -14.33% (median -11.44%), the median duration is approximately 63 days, and the average 12-month total return you would have if you bought on the start of the pullback is about 2.89% (median 6.07%).

The story here is that corrections are a normal part of the market. All investors will have to experience them at one point or another, but it’s their reaction that will determine investment success. We feel the correction that started on 1/26/2018, was just that, a simple market correction, and that the market is returning to a normal level of volatility. 

*S&P 500 intraday prices from 5/21/1980 – 5/21/2017

 

CRN: 2018-0402-6530 R

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.

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Effective, June 10, 2016, please note that Gene Peroni left Advisors Asset Management (AAM) to become President of Peroni Portfolio Advisors, Inc. Peroni Portfolio Advisors, Inc. ("PPA") is an investment advisor independent of AAM.