A Decade of Volatility in One Year

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A Decade of Volatility in One Year

Just a fraction of individual days typically make up a year’s annual US equity return. Take 2019, for example, when the S&P 500 rallied 29 percent after a major selloff in Q4 2018. Only 20, or 8 pct, of trading days accounted for that performance, and they were spread out all across the year. Therefore, in order to fully realize those gains, an investor had to own the S&P for the majority of 2019.

2020 has been a particularly unusual year in this regard, however, for the following reasons:

#1: There’s been a very high number of large positive one-day returns. We count any one-day move greater than 1 pct as “unusual” since that is +1 standard deviation from the S&P’s mean daily return over the last 6 decades.

  • There’s been 63 positive +1 pct days so far in 2020 versus the annual average of 53 one-percent days (both to the upside and downside) since 1958 (first full year of data).
  • Last year (2019), there were only 23 positive one percent days, including just one +2pct and +3 pct day each.
  • This year, there’s been seven +2 pct days, four +3 pct days, three +4 pct days, two +6 pct days, one +7 pct day and two +9 pct days.

Takeaway: 2020 saw 12 one day moves outside of 3 standard deviations, events that should only happen individually once every three years. In other words, we had many years’ worth of volatility concentrated into this year. That’s why the CBOE VIX Index had its highest-ever closing print this year, at 83 on March 16th, higher even than at any point during the Financial Crisis. This is a record we hope stands for many, many years to come.

#2: Most of the largest positive one-day moves this year were clustered towards early in 2020, around when the market bottomed on March 23rd. For example:

  • The largest positive one-day move in 2020 happened the day after the trough on March 24th, when the S&P rallied 9.4 pct.
  • The ten largest one-day moves this year (anywhere from +3.4 pct to +9.4 pct) occurred between March 2nd and April 8th.
  • There were also an elevated number of down +1 pct moves (46 so far), the worst of which were also concentrated between March and April.

Takeaway: magnified volatility to the upside and downside tend to cluster together. In 2020, these outsized moves occurred near the bottom, which brings us to our next and most important point…

#3: Throughout this crisis, we encouraged our clients to buy any down 5 pct day because history shows they are attractive entry points. Although these are especially rare, that magnitude of move happened 5 times this year. Here’s how much you’d be up today had you bought those closes:

  • 3/9/20 (down 7.6 pct on this day): +34 pct through today’s close
  • 3/12/20 (down 9.5 pct): +48 pct
  • 3/16/20 (down 12 pct): +54 pct
  • 3/18/20 (down 5.2 pct): +53 pct
  • 6/11/20 (down 5.9 pct): +22 pct
  • Actual realized return from buying these closes: +41 pct

Takeaway: a +5 pct down day is not an easy print to buy psychologically, but we will always advocate purchasing that kind of move.

In sum, the trajectory of US equity prices for 2021 remains to be seen, but whatever it holds don’t be spooked by days with large drawdowns because they tend to occur with upside volatility as well. Even more important, while investors who held on through the volatility this year did well, the real money to be made was buying outsized moves lower (down +5 pct).