One Percent Days and Fed Policy Shifts

By admin_45 in Blog

Good news: US equity markets are almost through what is typically the most volatile month of the year. The VIX has hit its annual high 5 times in October since it was created in 1990, tying August for the greatest number of peaks in the VIX compared to all other months.

The high in the VIX this year was 25.45 on January 3rd from the overhang of an especially volatile Q4 2018. At a 13 handle, it is currently nowhere close to that and also far below its long run average of 19. Even still, investors tend to feel volatility based on the daily price swings they see on the tape at the close.

We measure this kind of volatility by tracking how many days the S&P 500 rises or falls by 1% or more in a given trading session at the end of each month. Here’s a refresher on how the first three quarters of this year went, as well as the first month of Q4:

• Q1 2019. 11 days when the S&P had a daily return of +/- 1%, here, as compared to 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. 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. 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.
• October 2019. With just two trading sessions left, there have been 6 one percent days (3 up, 3 down) so far this month. That’s slightly above average, as there should be about one 1% day a week under normal market churn. The quarterly average number of one percent days for Q4 is 14, so we’re +40% of the way there so far.

Here’s an update for the year-to-date as well:

• 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. Therefore, volatility is running below pace in 2019.
• Our bar chart of annual S&P 1% days after this section shows a clear pattern over the last six decades. Big market swings occur 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 again, this year is running behind.

So what does this mean for volatility during the last two months of 2019? Two points to wrap up:

#1: We are through the most volatile months of the year: August and October. What’s more, we’re heading into the least volatile month of the year: December. The VIX has hit its high for the year in December only once, but has troughed eight times which is the most of any month. As for November, the VIX has reached its high for the year twice during this month, but it has also bottomed three times in November.

#2: Despite the last two months of Q4 usually being quiet, we recognize that was not the case last year. Not only were markets unsettled about US-China trade relations, but the Fed was too hawkish and had to eventually switch its position back to easing in the New Year. As for this year:

• We expect President Trump to push for more progress on trade to keep consumer confidence high during the holidays. US economic growth is currently reliant on consumer spending, after all, and the President is getting closer to an election year.
• As for the Fed, Chair Powell’s messaging at tomorrow’s meeting will be an important indicator of stock market sentiment during the balance of this year. The central bank will likely cut rates one more time, but markets also expect it will mark the end of the Fed’s mid-cycle adjustment. Chair Powell does not have the best track record at communicating policy shifts, so hopefully he has learned from past choppiness as he will not want a repeat of last year.