Submitted by Jessica Rabe of DataTrek Research
Yesterday’s market action was a rather underwhelming performance given the trade war truce between Presidents Trump and Xi over the weekend, but it was still up over 1% so we’ll take it. We closely track up/down +1% daily returns for the S&P 500 because it’s a useful and more telling barometer of volatility than just looking at the VIX level. Here’s a rundown on the most recent data updated through today, and what it means going forward as we’ve officially entered the last month of the quarter and year:
The S&P 500 has risen or fallen by 1% or more during 19 trading sessions this quarter (20 including Tuesday). That’s above the Q4 average of 14 since 1958 (first full year of data), with still 17 more days when the market is open this year.
US stocks have seen a snapback in volatility over the past two months, as there were no 1% days in Q3. That sleepy action was unusual as a zero 1% move quarter has only happened in four other periods since 1958 (one in Q4 2017 and the balance in the early-mid 1960s). That said, there have been more up +1% days (11) than down days (8) this quarter.
For the year so far, the S&P has gained or lost +1% on 55 days. The annual average is 53 since 1958, so this has been an above-average volatile year with still a month of trading left. Even still, there have been more up +1% days (31) versus down days (24).
A year with above average one percent days (+53) does not mean the market will likely end the year down. Since 1958, 45% of those years had above-average volatility, but the S&P’s average total return during those years was +7.8%. As we frequently highlight, even 1987 was up by 5.8% on a total return basis by the end of the year despite a volatile last quarter with Black Monday.
While December has already registered a one percent day on the first day of trading for the month, it is typically the least volatile month when looking at the VIX. The so called “Fear Index” has troughed 8 times during the month throughout the course of the year since it was created in 1990; it peaked once in December 1996. The high so far this year was 37.32 on February 5th. Barring any economic/geopolitical shock, we highly doubt it will surpass that level.
What concerns us is our bar chart of annual 1% days, as there’s a clear pattern over the last six decades: large market swings occur during the beginning of a bull market, abate, and then climb higher towards the end of annual consecutive gains in stocks. This last cycle has been a bit unusual. After peaking at 134 one percent days in 2008, it looked like it was going to trough at 38 in 2014. It jumped to 72 in 2015 followed by 48 in 2016, but hit a new post-recession low of 8 last year.
The fact that the market has experienced above average one percent days this year this late in the cycle means the low vol period is likely done. The next few years could be just as volatile if not more than in 2018.
Overall, we still think the S&P 500 will end the year in the green. Even with a choppier than usual fourth quarter, it is up 4.37% YTD as of Monday. That said, our one percent day data further supports the market’s late cycle worries, and we expect volatility to be more like this current quarter in 2019.