Volatile Markets Can Still Outperform

With such a rocky fourth quarter thus far, would you believe us if we told you there have actually been the same number of days where the S&P 500 has gained over one percent as lost that amount? It’s true: there have been 8 down days of +1% and 8 higher of the same magnitude.

Tracking the number of +1% days to the up/downside for the S&P is one of our favorite ways to measure volatility. Here’s where it stands for this quarter and year so far:

• There have been 52 days in which the S&P has risen or fallen by one percent or more in 2018 through today. That’s just shy of the average of 53 dating back to 1958 (first full year of data), with still 27 trading sessions left in the year. [su_spacer] There have been 16 one percent days this quarter through today, already above the average of 14 for the fourth quarter, again with almost 6 weeks left in 2018. To put this in perspective, there were oddly zero one percent days last quarter, so investors have certainly felt the larger number of daily swings of late. The average number of 1% days for each of the first three quarters is 13. The first quarter had above-average volatility with 23 one percent days, while the second quarter matched the average of 13 days.

• There’s actually been more up one percent days than down this year.There have been 28 up one percent days so far, versus 24 down one percent days. Investors feel the down days more due to prospect theory (people tend to feel pain more acutely than joy), but it is important to remember that volatility happens both ways.

• Moreover, a year with above average volatility (greater than 53 one percent days up or down) does not necessarily correlate with negative annual performance. Over the last six decades (1958-2017), 45% of those years had above average volatility; nine of those years ended in the red relative to total returns, while 18 still finished higher. Consequently, the S&P’s average total return during those years was +7.8%. Remember, for example, that even a very volatile year like 1987 was up by 5.8% in the end.

So what do we make of all this? We’ve consistently given our readers the heads up that Q4 is typically the most volatile quarter of the year, and October is usually the most volatile month. The VIX, for example, has peaked in October for the year five times since it was created in 1990; it has also never troughed during last month throughout the course of a year. November is more mixed, with 2 peaks and 3 troughs.

If you’ve had enough volatility, you’ll be glad to know December is typically the quietest month of the year. The VIX has bottomed 8 times during this month and only reached a high once throughout the year. That said, we think higher volatility is far from over. With the midterm elections done, the Trump administration can be even more aggressive when it comes to trade, as Vice President Pence has shown over the last few days. We will be watching politics closely, as the stock market’s fate for now is likely in President Trump’s hands as we get closer to the G20 summit in Argentina.