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What Recent Volatility Means For Markets

Mar. 05, 2020 9:57 AM ETSPDR® S&P 500 ETF Trust (SPY)60 Comments
Ploutos profile picture


  • The recent large swings in the domestic equity market are put into a historical context.
  • Volatility this sharp is relatively rare, and concentrated in poorly-performing markets.
  • Market environments with swings as large over a similarly short period have tended to be part of broader market sell-offs, on average.
  • This article also looks at periods where markets have overcome the exogenous shocks that led to high volatility and managed to post strong equity returns.

Stock markets have been on a roller-coaster ride. What I want to do for Seeking Alpha readers in this article is put this recent volatility in a broader historical context. I want to show what types of returns were generated in market environments with similar volatility. With those historical returns, I want to discuss the types of markets that this virus-induced volatility event might resemble.

Historical Volatility

Using a daily return series for the S&P 50 (NYSEARCA:SPY) and its predecessor indices dating back to 1928, I calculated the standard deviation of daily returns for rolling 10-day periods. 10 days captures the full seven-day sell-off that began on February 20th. That sell-off included three separate days with losses of greater than 3%. This period also includes two days of greater than 4% returns over the last three sessions.

In the graph below, I show this rolling volatility measure. Since we usually talk about volatility in annualized form, I multiplied the standard deviation of daily returns over 10-day periods by the square root of 252, the average number of trading days in a calendar year. Enough nerd-speak, here is the picture of this volatility metric.

How the stock market volatility of the coronavirus compares to other eventsThe blue line shows the historical volatility measure. The orange line shows its long-run average. After the last 10 trading sessions, the blue line currently sits at 48.3%, more than triple its long-run average of 14.9%.

You can see the episodic previous peaks where realized volatility has been higher. The debt ceiling debacle, sequestration, the U.S. debt downgrade by the S&P, and the escalation of the Eurozone crisis in 2011 was the last time volatility was this high. Prior to that period it was the 2008-2009 financial crisis.

In this long-run data series, just under 2% of rolling 10-day periods have had higher volatility than the most recent 10-day

This article was written by

Ploutos profile picture
Institutional investment manager authoring on a variety of topics that pique my interest, and could further discourse in this online community. I hold an MBA from the University of Chicago, and have earned the CFA designation. My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.

Analyst’s Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties, and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (60)

The key here is to develop/provide a cure and then vaccine - rate cut and additional spending are 2nd solution.
When people are afraid and not going out to shop or doing business - give them a few $$$ is not going to work right away (just slow down the drop in finical market)

The event is evolving quickly - in US people is still not treating this Disease seriously starting from the President. Look out below. It is still in the 2nd to 3rd inning. If you can’t sleep at night, raise some cash.

Take care
Here is what the top 1% is doing -

I would normally say a standing President would not withstand the economic upset this human health crisis may bring to the planet. However our current President, THE Black Swan of the last 5 years, will soon consolidate his reign for another 4 years. What may look like deflation risks evaporate and the world economy will surge ahead by late spring to mid-July. THE Black Swan reigns but I do not rejoice.
If this were to happen in more countries, there will be severe shocks to economies worldwide

Coronavirus: Northern Italy to 'quarantine 16 million people' www.bbc.co.uk/...
Thank you for the data presentation.

If you further selectively limit your data, there are 3 U.S. election years in your data table: 1932 (-14.8%), 1940 (-9.7%), and 2008 (-36.6%). Do you know the 95% confidence interval for extrapolating this data?
Pedro Larroy profile picture
you should use geometric average
the market has already gone a long way to discounting a slower economy for a couple of quarters. I don't believe this episode can be neatly lumped in with many of the other periods because it is not financial in nature. Once the media and markets realize corona will not be as bad as they are portraying, the market will move back up. While we may have already made the bottom on Feb 28, I would not be surprised to see a re-test of the bottom that could take us to 2700-2725.
i agree on the 2700. If it approach near that, that will be the bottom. Investors wont let the market drop below that
The coronavirus is still expanding...
Why would anyone buy before the corona virus stops expanding.

Buy AFTER the virus starts to decline.
people are afraid they are missing out. so they buy buy buy. but the large investors already made profit and dumping.
Tendies profile picture
SPY puts for tendies
cymonian profile picture
What is this? Autists on SA? lol tell the others to come too, it'll improve the vibe here.
Tendies profile picture
Ok I'll bring the gay bears over to SA
cymonian profile picture
SameAsItEverWas profile picture
The bond market is collapsing. Hitting all time lows for the entire history of our nation as we speak. The bond market is not fooled or pumped as easily as the stock market. This is becoming very ugly. It is historically unprecedented, and the BTFD types could send a lot of people into bankruptcy. The virus is the excuse for the drop, historic unsustainable debt is the reason.
Yield on safer bonds is collapsing as risk aversion has grown. HY/Junk is still at 5% yield as a quarter of it is in Energy which is not doing well right now. If this Covid-19 disappears by June and 2nd half of 2020 limps back to normalcy, there will be a massive dumping of bonds. They are currently at a 40-year high. Correction in Bond prices will make the current stock correction look like a picnic. I would short Duration. Yes there will be bankruptcies in Energy if crude prices get stuck in the 40s...but nothing justifies the run up we’ve seen recently in 20-yr treasuries (TLT)....
I absorb the negativity and use it to boldly buy on these dips. not all in but nearly. I have been buying select puts on rips to protect from another capitulation selloff. buying lmt near it's bottom and selling yesterday my best trading move so far. best of luck in these times
arthur_bishop1972 profile picture
That's nice work, brain.
Luckey Duckey Hunter profile picture
We’re way passed due for a recession. Only a few companies worthy of their stock price, the rest is purely inflated. Tesla can’t be more valuable than all big 3 combined.
Luckey Duckey Hunter profile picture
When the real correction occurs, essential businesses can survive. Costco, Walmart, certain banks and credit card companies, a few luxury brands such as Apple, and other essential such as energy and telecommunications will be impacted by can maintain as people still have to eat, drive, heat/cool their house, use the phone, rely on financial institutions, and ‘treat’ themselves. Surprisingly, vice companies tend to do well during hard time when we would think people cut those non-essentials first. But then we see multi-billion dollars energy companies’ share price struggle even though they are still very profitable, especially comparing to make-believe companies.

I missed my chance for a quick 4.2% real gain this week to ease the paper loss of energy, which I am holding until I see gas price hits zero or negative and my utility company sends me checks instead of bills.
Cutting interests even further in a low interest rates environment shows you that the central banks ammunition is almost used up. Trump needs to create an infrastructure program to support the economy now. the Chinese did the same thing in 2008 and also did it a few weeks ago. Unfortunately, the. Americans don't believe in government interventions, aside from the FED printing money of course.
SameAsItEverWas profile picture
^Nailed it.
The Fed has a hammer but the economy needs a screwdriver.
IT Gal profile picture
The $VIX didn't even drop below 30 on the rallies, like yesterday. Then you have it explode higher to 40 today. And those rallies both on Monday and Thursday were lead by Defense areas, Low Vol and Utils on Monday, Health care, Low Vol and Utils On Thursday.
You have yields plummeting....even in 30yr tips that actually went negative today.

If you want to look to the past and do comparisons...then look to Oct 08
Where they had massive one day rallies that were lead by...Low Vol, Utils...on the belief that the Fed doing emergency cuts would save the day.Credit market/bonds were not buying it then (just like now).....then the bottom fell out...and they finally got their low.

Right now the market is trying to figure out price discovery on the virus. But, it's failing to do that and flailing about.
You likely won't see the bottom of lows until you get full capitulation on sentiment.
And we are not there yet. There is still too much bullishness.
Trade wisely all. Cheers.
Yield on 10-yr note is now 0.74%...on Friday it reached a historic low of 0.65%...Bond markets are flashing red signals. Rates plunging towards zero would see flight to quality within the debt markets. The ability of many companies to borrow from debt markets will be severely curtailed.
Lot of CCC-rated debt carrying companies will go bankrupt - particularly in Commercial real estate, Energy & Retail industries. Half of investment grade debt is BBB - rated - a notch above Junk/High Yield. We will see a lot of downgrades that will render the debt of many over-leveraged companies to Junk status. Our Travel & Tourism industry is 10X that of China. With the IPO market in holding pattern & debt market becoming very picky - Cash flow will be impacted and there will be liquidity concerns. Do not ignore the signals from Debt market. Interest & principal payments CANNOT be missed...dividend is discretionary cash flow...Interest is mandatory to stay in business. Hope we come out of this covid thing soon...
Value Digger profile picture
Investors are advised to stay on the sidelines. It's too early to jump aboard. It will get worse before it gets better. Here is why:

1) The U.S. has limited ability to effectively test for Coronavirus. Once we see more tests, we believe that the number of cases in the U.S. will explode.

2) Europe has lost the containment game, based on these numbers below comparing Feb 28th, Mar 2nd and today Mar 5th (Each is 3 days apart):

Italy: 888, 1501, 3858
Germany: 60, 165, 514
France: 57, 191, 377
Spain: 33, 120, 259
UK: 20, 40, 115
Switzerland: 15, 24, 114

As a result, we draw this conclusion:

1) The European economy and the global economy will be negatively impacted by Coronavirus in the first half of 2020 (at least).

2) Since Europe was unable to control the spread, North America will most likely lose the containment game too, which will impact negatively both the American and the global economy in the first half of 2020 (at least).
The annual return maybe affected by the time of increased volatity. I mean that the annual return maybe very different if the high volatity occurred in December vs January (close to the end of the calendar year vs in first halve of the year).
SPXS or SPXL profile picture
I think you are right in that this correction should be part of a greater market decline. The bounces may have been dead cat bounces on the way down to a quick 30%-40% decline. The market may be interpreting Warren dropping out as a boost for Sanders and another headwind to deal with. I'm refraining from buying unless we get another 3%-5% downside. Even then it may not be the bottom. Some SA analysts have said we've formed a bottom, but I'm not so sure. Thank you for the insight, the main point is more often then not, the high volitility has led to overall declines the reset of the year. I think we'll see capitulation before the summer and a V shaped comeback.
There's no way we have a V shaped comeback.
just too much uncertainty.
2 much QE profile picture
There is a nasty fight going on between the bull and bear hence extreme volatility. The bulls only have fiscal stimulus on their side to fight. The bears have poor upcoming corporate market indicators on their side, which is the fabric and foundation of the stock market as a whole. The economy runs in cycles like seasons. Silly how governments are doing anything they can to have an endless summer. Their financial interventions just make the upcoming economic winter more powerful and harsh (inflation, enormous debt, etc).
IT Gal profile picture
Agreed. They can throw the kitchen sink at it, but it won't help.
The cycle will win. It always does.
They got a reprieve in 2016...
I don't believe they will get one this time.
since when is debt is a bad thing? Every single dollar owned means that this dollar is also owed somewhere by someone. That's simple economics. Inflation has been low and the interests as well. Just shows that central banks have no ammunition left. It's up to the government to change that by creating and infrastructure program and increase debt levels.
2 much QE profile picture
Debt will not allow growth. Think of it like your credit card bill and your household finances. The larger the credit card debt, the more you accumulate interest and eating into your savings to pay off just the interest. Inflation is low for now...
Think Long Term profile picture
Sooner, or later, the number of morons who think buying stocks, at overpriced levels and not based on true fundamentals, will run out. When enough are sucked into hold the bags, then we will see the collapse. We’re very close to the tipping point.
@Think Long Term : Yeah, just look at the incredible, ludicrous Tesla Blow Off Top to $920. There are a lot of, let's say unsophisticated "investors" in this market.
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