It has been 7 weeks since the S&P 500 moved more than 1% in one day. That’s how we gauge “real” US equity volatility, by tracking how many days the S&P 500 rises or falls by 1% or more in a given trading session over the course of each quarter and year. By this measure, it’s been a quiet 2019 despite some choppy trading the past couple of days. And even those did not breach the important 1% threshold.
To recap, here’s how this year has gone so far:
- Q1 2019 (below average). 11 days when the S&P had a daily return of +/- 1% versus Q1’s average of 13 since 1958 (first full year of data). Three of those 1% days were negative, while the balance were positive.
- Q2 2019 (well below average). 7 one percent days in the second quarter (4 down, 3 up), versus Q2’s average of 13 over the last six decades.
- Q3 2019 (above average). 14 one percent days (5 down, 9 up) in Q3, over the quarterly average of 13 by one. That was largely due to August, which had 11 one percent days. By contrast, there was only one 1% day in July and two in early September.
- Q4 2019 QTD (well below average). There have been 6 one percent days so far this quarter compared to the Q4 average of 14 (3 down, 3 up). October accounted for all those 1% days, as November had none.
Zooming out, here’s an update for the year-to-date:
- There has been a total of 38 one percent days so far this year compared to the annual average of 53 over the past 60 years. Volatility is therefore running below pace in 2019.
- Our bar chart of annual S&P 1% days before this note shows a clear pattern over the last six decades. Big market swings happen during the start of a bull market, abate and then rise again towards the end of annual sequential gains in US stocks.
- This last cycle has been more mixed than usual. The post-Great Recession low will likely be 8 one percent days in 2017. Last year was more in keeping with late cycle norms at 64 one percent days versus the annual average of 53, but this year is running behind.
Even with the pickup in volatility during the first two trading days of this month, here’s how we expect to close out the year:
#1: December is typically the least volatile month of the year. The VIX has bottomed eight times for the year in December since it was created in 1990, which is the most of any month. That said, the VIX has peaked once during the last month of the year back in 1996, so while uncommon, it’s not unprecedented. Worth noting: this year’s low-to-date on the VIX was on November 26th, at 11.54.
#2: Although December is usually quiet, last year defied this trend due to a hawkish Fed and contentious US-China trade relations. While the Fed seems to have learned from its past mistake with its now-dovish message, it seems this year’s stock market gains and a still strong US consumer economy have given President Trump the confidence to take more of an aggressive stance on tariffs. The market may not currently be worried about the former, but we’ll see if the latter overshadows this month’s stock market performance despite the seasonal tailwind.
#3: There should be about one 1% day a week under normal market churn. Even with negative trade headlines, the S&P still didn’t get there over the past two trading sessions. And even if it did, one percent moves tend to cluster together if real trouble is afoot.
Bottom line: no doubt December started off choppier than investors expected, but we do not think the current setup portends a sharp drop in US equities like last December. The stock market has experienced below-average volatility this year, and a few one percent days a month is normal even if a little uncomfortable. The fact that we haven’t had one in several weeks is odd, especially this late into the economic cycle…