1% Volatility Days: Q1 Edition

We’ve been warning that this year’s February high of 37.32 in the VIX may not be the peak for 2018, as that month has only marked an annual high once since the index was created in 1990. So how are we shaping up since?

• In March the VIX reached a high of 24.87, lower than Q1’s peak in February.

• The VIX averaged 17.4 in Q1, compared to 11.1 last year and the long run average of 19.4.

• Not bad so far, but note that the VIX has only peaked in March once – just like in February – for all the years since 1990. These are typically quieter months of the year.

• At the end of the second trading day of Q2, the VIX is already running above the long run average at 21.10.

We’re not trying to be alarmist, but we believe monitoring both actual and implied volatility helps tame the behavioral biases that create unforced errors at near term lows. Our favorite way of measuring actual US equity volatility is to count the number of days the S&P 500 gains or loses 1% or more. Consider this breakdown to put Q1 in perspective:

• There were twenty-three 1% days in Q1, nearly triple the number of such days in all of 2018 (8), and almost double the Q1 average of 13 since 1958. Keep in mind that even though we feel down days the most, volatility goes both ways: there were actually 12 up 1% days and 11 down said days despite ending Q1 down 1.2%.

• Just like in Q1, the second and third quarters average 13 one percent days, while the fourth quarter averages 14 days (data back to 1958).Even if the last 3 quarters of 2018 have average volatility (unlike in Q1), 2018 would have 63 one-percent days, exceeding the annual average of 53 since 1958. If we encounter the same volatility in Q2 2018 as in Q1, the S&P would nearly reach the long-run annual average in just the first half of this year.

• Note that the most volatile months are still ahead. Months where the VIX has peaked the most in each year since 1990 include: April (3 highs), June (3), August (5), and October (5).

So with already 23 one-percent-plus days on the board for Q1, what can we expect in terms of volatility and performance in Q2 and the year? We looked at other years since 1958 in which there were between 20 and 25 one percent days. Here are the results:

• There have been between 20 and 25 days of +/-1% moves during 9 other years: 1974 (24), 1975 (25), 1983 (20), 1987 (20), 1988 (23), 1991 (20), 1999 (25), 2002 (22) and 2015 (21).

• The average 1% days in the following quarters during those years were all above their long-run averages: Q2 (19), Q3 (22), Q4 (22). There were 86 one percent days annually on average during those 9 years compared to the long-run average of 53 since 1958.

• The good news: average price performance during those 9 years was +1.9% during Q2 and +6.1% for the year. The average total return for those years was +9.6%.

The upshot: Prior years with similar volatility as we just had in Q1 ended with Q2 and the year up on average. They experienced greater quarterly volatility to get there, but finished in positive territory nonetheless. As we’ve repeatedly suggested to our readers, expect higher levels of volatility going forward, but it’s not a solid excuse to leave equities when you look at historical performance.