(Published the evening of 4/21/20)
There have been 42 days in which the S&P 500 has posted a +1% one-day move this year, closing in on the annual average of 53 days over the last +6 decades, and we’re not even a full 4 months into 2020. 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 under normal times, but here’s a breakdown of this year so far:
- Q1 2020: 30 one percent days versus the Q1 average of 13 since 1958 (first full year of data).
- Q2 2020: 12 one percent days, or just one away from the Q2 average of 13 with over 2 months left to go in the quarter.
Registering 30 one percent days in Q1 was a very unusual development and this quarter is setting up to hit it again. The S&P has only had thirty +1% daily returns in a given quarter 18 times in the last +60 years, or just 7% of the time. Let’s look at those instances along with the index’s price return and number of 1% days in the following quarters to help see what it signals.
Those historical examples:
1974: Q3 (38 one percent days) and Q4 (32). The S&P 500 was up +7.9% (Q4 1974) and +21.6% (Q1 1975) in the quarter after those two periods, and there were 32 and 25 one percent days respectively. It took +5 quarters to get below the quarterly 1% day average (13) after Q4 1974.
1982: Q4 (30 one percent days). The S&P was +8.8% in Q1 1983, and there were 20 one percent days. Volatility subsided quickly, as the next quarter saw an average number of one percent days.
1987: Q4 (42 one percent days). The S&P was +4.8% the next quarter, and there were 22 one percent days. There was above average volatility in the following 2 quarters as well.
2000-2003: Q1 2000 (30 one percent days), Q4 2000 (30), Q3 2002 (44), Q4 2002 (34), and Q1 2003 (31). Here were the returns and number of 1% days in the next quarters:
- Q2 2000: 26 one percent days, S&P down 2.9%
- Q1 2001: 29, -12.1%
- Q4 2002: 34, +7.9%
- Q1 2003: 31, -3.6%
- Q2 2003: 23, +14.9%
- There was above average volatility in the two quarters after Q1 2003 (last +30 one percent day quarter) before markets finally settled down.
2008-2010: Q1 2008 (31 one percent days), Q3 2008 (36), Q4 2008 (50), Q1 2009 (41), Q2 2009 (34), and Q2 2010 (30). Here are the index returns and number of 1% days in the following quarters:
- Q2 2008: 17 one percent days, S&P down 3.2%
- Q4 2008: 50, -22.6%
- Q1 2009: 41, -11.7%
- Q2 2009: 34, +15.2%
- Q3 2009: 21, +15.0%
- Q3 2010: 20, +10.7%
- Volatility returned to normal in Q4 2010.
2011: Q3 (33 one percent days) and Q4 (36). The S&P rose 11.2% in Q4 2011 and 12.0% in Q1 2012, and there were 36 one percent days in Q4 2011 and a below average number of quarterly 1% days in Q1 2012.
Here are our takeaways from this data:
#1: When the S&P registers at least 30 one percent days in a quarter like Q1 2020, the next quarter almost always also experiences above average volatility (more than +13 one percent days). Out of the 17 quarters the S&P hit +30 one percent days prior to 2020, the next quarter had 28 one percent days on average. The only subsequent quarter that had below average volatility was in Q1 2012 after 36 one percent days in Q4 2011 as the Troika agreed to another bailout package amid the Greek debt crisis.
#2: Heightened volatility does not necessarily lead to negative returns. After the 17 times the S&P had +30 one percent days in a quarter before this year, the index was up 65% of the time in the following quarter; the average next quarter return was +4.3%.
#3: Amplified volatility did persist for many quarters during the dot-com bubble bursting and the Financial Crisis. In contrast, there were just two +30 one percent day quarters in 1974 amid a recession due in part to the Saudi oil embargo. There was also only one in 1982 from a short recession as the Federal Reserve used contractionary monetary policy to fight inflation. And of course, one in 1987 from the stock market crash of ’87.
A lesson from that: one percent days are a useful indicator of how effective and appropriate Federal government/Fed policy responses are to a given set of economic challenges. 2008 and 2009 had the greatest number of quarters with +30 one percent days versus any other period due to delays in fiscal stimulus (Nick’s commentary in Markets today).
Bottom line: as much as the US government and Federal Reserve have acted relatively quickly with large scale economic assistance in the form of stimulus, zero interest rates and other measures, keep watching one percent days. We are looking for a decline in the number of 1% days, at least to below 30 a quarter, to signal durable market confidence about these policy responses. So far this quarter, the S&P is already over a third of the way to 30 one percent days with over 2 months left to go; if it continues at this pace the market is telling us something is still very wrong.