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Dispatches Economic and Market Analysis

An Unusually Volatile Year

The S&P 500 index is experiencing one of its most volatile years since the financial crisis of 2007–2009. 

by Charles Rotblut | November 2022

Charles Rotblut leads a class in AAII's new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

The S&P 500 index is experiencing one of its most volatile years since the financial crisis of 2007–2009. Through mid-October, the large-cap index has risen or fallen by 2% on 38 trading days. This is well above the post-financial crisis average of 14 days.

Only 2020 saw more days with a daily change of greater than 2% (44).

Not shown in the chart here are days with a daily change of at least 1%. The S&P 500 has had 99 of such days this year so far—just 10 days shy of 2020’s total but far above the post-financial crisis average of 55 days per year.

Though often thought of in terms of downside moves, volatility refers fluctuations in price—both positive and negative—when discussed in terms of stock market movement. As you can see in the chart here, there has been a nearly equal number of days with big upward moves as there have been with big downward moves.

FIGURE 1 S&P 500 Days With a Daily Change of More Than 2%

People rarely complain when there is a high level of upside volatility. It’s the big downward moves that unnerve investors.

We’re all familiar with the reasons why this year has been volatile: inflation, tightening monetary policy, the war in Ukraine, ongoing supply chain issues, the so-called “smart money” being awfully reactive, etc. How the market’s swings affect a given individual investor depends on their need for portfolio withdrawals.

Downside volatility is a gift to investors saving for long-term goals. The lower prices allow each dollar saved to buy more shares. If you are in this camp, be greedy.

A safe assets bucket (e.g., an allocation to cash equivalents) can help those taking withdrawals to avoid selling stocks (and bonds) when they are down in price. If this isn’t an option, see if your portfolio income (dividends, distributions from funds, coupon payments from bonds, etc.) is enough to support withdrawal needs during downswings.

In between contributing and withdrawing is the age-old advice of staying the course. The sizable market moves in both directions that have occurred this year have increased the behavioral risk of attempting to time the market. Misjudging the market’s direction can leave you with far less wealth than if you simply do not make any portfolio changes.

Discussion

ED W from DE posted over 3 years ago:

AGREE Most unusual for the items mentioned but even for many unexplainable reasons SAD


ED W from DE posted over 3 years ago:

AGREE Most unusual for the items mentioned but even for many unexplainable reasons SAD


ROBERT A from NC posted over 3 years ago:

Some excellent advice here! Charles, you sound like you're coming to the recognition that volatility is not risk. If so, welcome to the club! Against conventional wisdom, I find it highly entertaining to watch my portfolio daily. It's good desensitization training. Watching boatloads of dollars appear out of nowhere or vanish in the mist is captivating! In the course of over 40 years in the stock market, I've discovered that the most profitable activity is to sit still and do nothing.


Peter N from TN posted over 3 years ago:

Market volatility speaks to the need for backtested investing algorithms which incorporate stop loss and black swan indicators. Algorithms need to provide clear calls to action when it is time go to cash and when it is time to switch back into stocks and ETFs. Whether it is called market timing, tactical asset allocation, or something else, following the rules of a backtested investing algorithm should help enable an investor to be dispassionate, systematic, and evidence-driven--and to reduce drawdowns during markets like the one we've been in since January.


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