The S&P 500 has moved +1% up or down on 57% of trading days so far this year. That’s our fundamental benchmark of how much investors “feel” volatility, as any one-day move greater than 1% to the upside or downside is more than 1 standard deviation from the S&P’s mean daily return. There is typically one 1% day a week in normal times, but here’s an update on an especially choppy 2020 YTD:
- January through 5/20: 55 one percent days, already besting the annual average of 53 over the last 6 decades less than half a year in.
- Q1 2020: 30 one percent days versus the Q1 average of 13 since 1958 (first full year of data).
- Q2 2020: 25 one percent days compared to the Q2 average of 13 with over a month left to go in the quarter.
Bottom line: 30 or more one percent days in any given quarter is very unusual and only happens 7% of the time. Not only did the S&P hit that threshold in Q1, but it should easily exceed it this quarter. Here’s why that matters:
#1: The quarterly record for +/-1% days was 50 in Q4 2008, largely due to a delayed fiscal policy response to the Financial Crisis after the national election that November. Markets knew the change in political power would freeze progress on implementing a stimulus package. That’s exactly what happened, as Congress did not pass ARRA – the landmark recovery bill for the Financial Crisis – until a few months later in February 2009 (one month before the market bottomed). Consequently, 2008 had the most number of +/-1% days (134) in any year on record, concentrated in Q4.
Once the new political regime took place and action, however, market volatility declined thereafter: 41 one percent days in Q1 2009, 34 in Q2 and 21 and 22 in Q3 and Q4 respectively.
#2: 2020’s COVID-19 Crisis could post a new annual record of +/-1% days due to the uncertain cadence of the virus, economic recovery and interplay between both issues. Monetary and fiscal policy drive market behavior, and the number of 1% days provides a measurement for how certain investors are about asset prices being correctly set. Greater clarity reduces market volatility, but the longer the number of 1% days falls outside of the normal distribution – as we’re currently seeing – the more it signals a high level of uncertainity among market participants.
#3: So far, the policy responses from both the Federal Reserve and Federal government have been quick and aggressive… yet +1% days continue to persist including everyday so far this week. We don’t think this amplified volatility will end anytime soon given the overhang of uncertainty for many unknowns. When will we get a viable vaccine? What will unemployment be at the end of this year? How will corporate earnings look in 6 months? Not to mention… How will COVID-19 impact the elections this fall?
Should President Trump and Republicans lose the White House and Senate this November, it could create the same kind of power vacuum as occurred in Q4 2008. Depending on how the virus and economy take shape this fall, it’s important to capital markets that 2020 does not end up being a delayed version of 2008 by putting a halt to however DC needs to respond from November 4th to Inauguration Day 2021.
In sum: this analysis is not a signal about stock market direction, but rather framework to understand why heightened volatility could easily be an unwelcomed “new normal” for the remainder of this year, whether US equities finish higher or lower. Seeing an abnormally high number of 1% days – as we are right now – says markets remain unsure that the policy response to COVID-19 can overcome the challenges ahead.