The word “volatility” has an odd origin; in Latin volare means “to fly”. Over the last 2000 years it has taken a different meaning, of course – more about plummeting than soaring and also closely tied to the price of financial assets. A quick scan through Google Trends shows that “volatility” is most commonly searched in New York, New Jersey, Connecticut and Massachusetts. The rest of the country, not so much…
With the US large cap Technology sector seeing incremental volatility (of the plummeting variety) over the last few weeks we got to wondering: it is really unusually choppy out there, or did 2017’s remarkable low volatility run just lull us into a false sense of security? Anchoring on recent experience is a common psychological trap, after all. And one to be avoided.
To get an answer to this question we:
- Pulled the daily prices for the XLK exchange traded fund (the Tech stocks in the S&P 500, market cap weighted) and calculated daily returns from 1999 to the present.
- Took 30 and 90 standard deviations of those daily returns. This measure, unlike those based on options pricing (such as what we used in today’s Thought Piece), shows what actually happened to Tech stock prices from the dot com bubble peaking and bursting, then through the Financial Crisis to today.
- Calculated a long run average for 30 and 90-day actual volatility.
The two charts below show the data. Here are our conclusions:
#1. 2017 did see the lowest actual price volatility for US Tech stocks going back to the late 1990s. The actual trough for price churn was in May, with the standard deviation of daily price change at 0.41% for 30-day historical returns and 0.43% for 90-day returns. Prior periods of low volatility include Q3 2014 and Q4 2006, as the 90-day chart below shows well.
#2. The long run average level of Tech stock price volatility is 3 times greater than what we saw last year. Since 1999, the average standard deviation of returns has been 1.37% over a 30-day window and 1.40% over a 90-day span. The charts show a similar pattern to the long run CBOE VIX Index – volatility is sticky at low levels for long periods, spikes much higher for a shorter period of time, and then returns to low levels.
#3. The bottom line is that Tech stocks are not abnormally volatile just now – in fact, they are either close to long run average levels of daily price change or still below, depending on the time frame you use. Looking at 30-day historical price changes through yesterday, the standard deviation of those daily moves is 1.39% (long run average is 1.37%). Over the last 90 days – essentially 2018 YTD – the standard deviation of returns is 1.18% (long run average of 1.40%).
The point here is not so much “Tech is fine, go out and buy the group” as it is “understand how Tech stocks actually trade”. Believe it or not, what you see on your screen now is “Normal”. That’s fine over the long run; remember that Tech is the best performing sector over the last 1, 5 and 10 years.
But don’t forget our etymological lesson at the top of this note: if you want to fly, volatility is never too far behind.