2021’s Astoundingly Average Volatility

Dearest readers, we have an apology to make. You see, yesterday afternoon we were hard at work pulling data on the S&P 500’s volatility this year, and we were quite eager to show you that, despite what headlines have implied, stocks’ volatility this year has been amazingly … average. So, of course stocks had to tumble at today’s open, hitting about -1.5% intraday before clawing a good chunk of it back to finish down just -0.9%.^[i] What we are trying to say is, if you believe in jinxes, then we must begrudgingly accept that there is a chance our not-so-high volatility research triggered the market, which Fisher Investments founder and Executive Chairman Ken Fisher often calls, “The Great Humiliator” to throw some egg in our faces. Then again, we also think today’s market movement proves our initial point: If headlines resort to hyping a -0.9% day as impressively volatile, then that seems to us a good indication of just how placid this year has been—and how myopic the world is right now. Let us show you.

To put this year’s wiggles in perspective, we downloaded historical data from FactSet—93 and a half years of it, to be precise. First we gathered the S&P 500’s daily price return for every day since January 4, 1928 through June 30 this year—cutting it off there so we could easily equalize a half-year with 93 other full years. Then we used some Excel, umm, wizardry to calculate the average magnitude of the index’s daily price movement for each year.^[ii] In other words, the average amount the index moved up or down on a given day in each year from 1928 to the present. We were after magnitude, not direction, because volatility is technically about how much the market moves over a given period, not whether that movement is up or down. Never forget volatility cuts both ways—0.9% up is just as volatile as Thursday’s dip.

The wildest year, on the basis of average daily return, was 1932. Then, the average daily price movement up or down was a whopping 2.59%. The calmest year was 1964, with an average daily wiggle of just 0.26% in either direction. The average for all years? 0.76%. The median, if you are into that sort of thing, is 0.65%. And through June 30, this year’s average daily movement up or down was … wait for it … 0.64%. That is about as typical as you can get.

Now, here you might point out that while these averages are helpful, even the average magnitude can obscure a lot of big days if the rest of the days are quiet enough. Fair enough. So, we crunched the data a different way and tallied up the total number of daily moves of 1% or higher and 2% or up in each year. For 2021, we equalized the data by doubling the first half’s totals—which isn’t how markets work, but was a handy way to show how 2021 would compare if the first half were a full year. Here, again, the most volatile in both categories was our old pal 1932. It had 181 days of 1% or more and 132 of at least 2%, which, yowza. In the 1% category, 1964 was again the calmest with just three days that big, while that year and eight others had zero days of 2% or more. Here, too, 2021 is a regular plain Jane: If the first half repeated perfectly, this year would rank 43^rd out of 94 with 58 days of at least 1% up or down, and 47^th on the 2% front with 8 days.

Today’s market movement, of course, would not change the preceding sentence. The frenzy over it, in our view, shows just how myopic people are right now. It also follows this year’s pattern of headlines blowing small events far out of proportion. Remember the freakouts over the collapse of private investment office Archegos? Or the UK’s Greensill Capital? The wild ride in GameStop and the related Congressional hearings? The Suez Canal blockage? Post-Brexit chaos at ports? The UK and EU’s squabbles over chilled meats crossing the Irish Sea? Hyped by headlines, many thought these—and more—were hugely significant for markets, the economy or the financial system’s inner workings. Yet all came and went, and at least some of those mentions probably made most readers draw a blank, because they have long since receded from the international consciousness.

For all the alleged drama, market-wise this has been a pretty calm and uneventful year. There is a lot of talk on multiple fronts. But stocks have mostly risen calmly throughout, without much in the way of pullbacks. Stretches like that are something to enjoy. But they are also not predictive, so we remind you volatility—bigger than today’s—can return at any time, for any or no reason. That could include a correction—a sharp, sentiment-fueled drop of -10% to -20%—which can also start for any or no reason. A lack of volatility isn’t any more predictive than volatility itself. So enjoy the calm waters if they last a while longer. And if they don’t, remember volatility comes with the territory sometimes. It is the tradeoff for stocks’ very nice long-term returns.