This Year’s Volatility Has Been Normal

This week’s relative calm in the markets is likely a welcome change. It follows an approximate six-week period where the S&P 500 index swung in a 186-point range. The point range equates to an approximate 6% move in both directions.

More telling are the day-to-day moves in the large-cap index. The S&P 500 closed either up or down by at least 1% during 13 out of the 26 trading days ending last Friday. To put this into perspective, there were only 19 days when the S&P 500 closed up or down by more than 1% for the entire period of January 1, 2019, through July 29, 2019.

If it felt like the market was even more volatile, it’s likely because you’re paying attention to intraday moves and focusing on point changes instead of percentage changes. There was a 12-consecutive-day streak in August when the S&P 500 moved by more than 1% on an intraday basis. These percentile moves equate to larger absolute point moves with major indexes at current levels relative to what we’ve seen in the past.

The media has yet to catch up to this fact. A one-percent change in the Dow Jones industrial average equates to a point change of more than 250 points. Yet, anytime the blue-chip average moves by 100 points or 200 points, headlines pop up about the change. A 200-point move in the Dow is no longer significant. Even a 400-point move would signify nothing more than a modest increase in intraday volatility. Headlines such as “Dow Tumbles” or “Stocks Soar” should be saved for much bigger point moves.

So far this year, the level of volatility—as measured on a closing day basis—hasn’t been worthy of using superlatives in headlines on most days. The S&P 500’s level of volatility is on pace to be about average with what we’ve seen since 2011 (40.4 days). Last year had 57 trading days when the S&P 500 gained or lost more than 1%; 2015 had 72 such days. At the other end of the spectrum, 2017 was unusually calm with just seven such days. Year to date, there have been 31 days with a gain or decline greater than 1% in 2019. Volatility can come in bouts, so this year could well end up being more or less volatile than average.

You know well two of the culprits responsible for last month’s price swings: trade and recession fears. China and the U.S. remained caught up in an on-and-off relationship (one day they’re talking and seemingly not the next), while the events in England would make a good script for the British version of “House of Cards.” Somewhere, writers of political dramas are probably saying to themselves, “Why didn’t I think of this?”

A third culprit is liquidity. The Wall Street Journal noted last week that trading activity has been weak across a variety of markets, including stocks, bonds, currencies and derivatives. When there are fewer buyers and sellers overall, an imbalance on either side can lead to bigger price swings. It’s typically not unusual to see lighter trading volumes in August.

Equity investors who didn’t react to last month’s swings or headlines haven’t experienced much overall change, beyond stock-specific movement (e.g., a reaction to earnings news). Various market indexes—both market-cap and equal-weighted—are roughly now at where they were three months ago. Despite all the chatter and headlines, the volatility didn’t take much of a bite out of diversified stock portfolios.

Of course, the big question is what happens next? As I find myself responding more and more often these days: If you can tell me what is going to happen with trade, I can give you a better answer. Uncertainty over trade is having an impact on the economy as well as the market.

While it’s easy to focus on what’s making headlines at the moment, the short-term moves in the stock market shouldn’t affect your portfolio decisions. Diversify your portfolio according to your cash needs—short-term horizons require conservative allocations (money markets, short-term bonds, etc.); long-term horizons require aggressive allocations (equities)—and you shouldn’t have to worry about what the market does on a given day.

You can, of course, use any bump in volatility to your advantage. If you are doing Roth IRA conversions, pick down days to transfer equities from your traditional IRA or 401(k) to the account. You’ll be able to move more shares over for the same tax liability. Volatility can also create opportunities to buy stocks you like when they are on sale and sell stocks otherwise violating your sell rules when market fluctuations push prices upward.

Most importantly, develop the habit of looking at the stock market—and especially your portfolio’s balance—less often. The markets will seem less volatile and you’ll be more disciplined.