The S&P 500 has moved higher or lower by +1% on over half of the trading days in 2020, reflecting an unusually volatile start to the year thanks to the COVID-19 Crisis. This is our fundamental benchmark of how much investors “feel” volatility, as any one-day move greater than 1% is more than 1 standard deviation from the S&P’s mean daily return back to 1958. Consider:
- There is typically one 1% day per week in normal times, or about 53 one percent days a year since 1958 (first full year of data).
- There have already been 45 one percent days so far in 2020 out of 81 trading sessions, representing 56% of the year.
- There have been 24 down 1% days and 21 up 1% days YTD.
That last statistic is important: bear markets tend to see more one percent days than usual to BOTH the downside and upside. For example, here is the split of up versus down 1% days during the worst years of prior bear markets (all these registered over 100 one percent days for the year):
- 1974: 68 down, 47 up
- 2000: 54 down, 49 up
- 2001: 54 down, 53 up
- 2002: 73 down, 53 up
- 2008: 75 down, 59 up
- 2009: 56 down, 62 up
The lesson: yes, there are more down one percent days during bear markets, but the number of up 1% days are not too far behind. Fair enough, but do bull markets see many up 1% days as well? Here are the number of positive 1% days for the last three major market rallies:
- 1991-1999 annual average: 29 up one percent days
- 2003-2007: 26
- 2010-2019: 28
To put this in perspective, this year’s volatile market action has already produced 21 up one percent days with still 8 more months of trading left to go.
Two points to wrap up:
#1: Our bar chart of annual S&P 1% days after this section shows a clear pattern over the last six decades. Big market swings occur during the start of a bull market, abate and then rise again towards the end of annual sequential gains in US stocks.
#2: There are typically a greater number of +1% days in bear markets than bull markets. So, while one might welcome snapbacks to the upside especially during the current volatile environment, don’t get too comfortable when you see large up days for the S&P. That’s more a signal about the high level of volatility in the marketplace than an investable green light.
Bottom line: even 3-5 day sequences of up +1% days, as we’ve recently enjoyed, are not an all-clear sign for US equity investors. The history here is clear enough. Stock price volatility is fundamentally tied to uncertainty. Whether a given day’s move is up +1% or down +1%, both are telling the same story: markets do not yet have enough visibility into the future to discount it reliably/consistently into asset prices.