Volatility & Viruses

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Volatility & Viruses

Until this past week, the S&P 500 had not had a 1% move in 70 days. That’s how we gauge volatility: by tracking how many trading sessions the S&P rises or falls by 1% or more because it’s a large enough swing that it starts to change how investors allocate capital. For reference, there should be about one 1% day a week under normal market churn, but this week there were three.

Needless to say, 2020 has started off a lot choppier than 2019. For example:

  • Last year, there were a total of 38 one percent days versus the annual average of 53 over the last 60 years. Volatility was therefore below average in 2019.
  • Our bar chart of annual S&P 1% days after this section shows that was unusual this late into an economic cycle as there is a clear pattern over the last six decades. Large market swings occur during the beginning of a bull market, abate and then increase 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. 2018 was more in keeping with late cycle norms at 64 one percent days versus the annual average of 53, but again last year was below pace.

So what do we expect for 2020? A couple of points:

#1: It took the outbreak of the Wuhan coronavirus for the S&P to register regular daily moves of +/- 1% this year.

  • There have been 3 one percent days so far this quarter – all of which happened in the last week – compared to the Q1 average of 13 (one up, two down). In other words, a little behind pace, but catching up.
  • This is also a good reminder that volatility – namely 1% days – cluster together, whether it be to the upside or downside.

#2: February has been a relatively volatile month for the stock market over the last few years:

  • We also measure volatility by counting how many times the VIX has peaked or troughed in any given month throughout each year since it was created in 1990.
  • While the VIX has peaked twice in February (2016 and 2018), it has never bottomed during this month.
  • To round out the quarter, the VIX has peaked once (2004) and has troughed twice (2002 and 2013) in March.

Bottom line: The Fed’s accommodative stance was enough to suppress volatility last year despite contentious trade negotiations between the US and China. Nevertheless, increased worries about the Wuhan coronavirus was able to cause a down 1% day on Friday even after Powell’s continued dovish tone this past week at his press conference. That’s not entirely surprising as we all share the same uncertainty of not knowing when the virus will be contained/treated and the impact it will have on global economic growth.

In the end, whether this heightened volatility continues will likely come down to how many more weeks China will remain on lockdown and how that filters into the European, Asian and US economies. Until then, we expect further choppiness ahead. The market does not like uncertainty and this dynamic lends itself to +1% downdrafts as we saw this last week.