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Since 1980, market volatility, which is defined as the annualized standard deviation of the S&P 500 over the previous 60 calendar days, has averaged 14.7%. During the past three years, volatility rarely hit that level. From the beginning of 2004 through the end of June (1277 days), volatility averaged 10.4%.

There have been two other extended periods of low volatility since 1980. The first ran from around June 1, 1983 to June 30, 1986 (1126 days), and the second ran from June 1, 1991 to March 31, 1997 (2131 days). Between 1983-1986, volatility averaged 11.9%, and from 1991-1997, volatility was 10.0%. Thus, our current time period is not unique.

In the three periods of higher volatility, volatility averaged 15.8% from March 1 1980 to May 31, 1983 (1188 days), 17.2% from July 1, 1986 to May 31, 1991 (1796 days),and 20.1% from April 1, 1997 to Dec 31, 2003 (2466 days).

Volatility averaged 10.6% during periods of low volatility, and 18.2% during periods of high volatility. There have been just under 10,000 trading days since January 1, 1980, and market volatility was above the 14.7% average 55% of the time.

Generally, lower volatility means higher returns. Annualized price returns (excluding dividends) for the aforementioned periods of low and high volatility environments were

Low Volatility

  • 1983-1986 15.1%
  • 1991-1997 12.0%
  • 2004-2007 9.0%
  • Total low volatility 12.0%
  • High Volatility

  • 1980-1983 11.9%
  • 1986-1991 9.4%
  • 1997-2003 5.9%
  • Total high volatility 8.3%
  • Therefore, if we are in a period of higher structural volatility, as I believe we are, market returns should be lower.

    Source: What Does Volatility Mean for Market Returns?