How many more +1% days does the S&P 500 have in it? That’s important to consider as investors assess whether the current US equity rally is sustainable. We use +/- more than 1% days as our fundamental benchmark of how much investors “feel” volatility because any one-day move greater than 1% is more than 1 standard deviation from the S&P’s mean daily return.
To answer that question we counted up the number of times the S&P had a daily move of positive 1% or greater during the four quarters after a bottom in US equities caused by a major economic/geopolitical shock back to the early 1980s. Here are the periods and their catalysts:
- Q3/Q4 1982 & Q1/Q2 1983: Recession created by Paul Volcker’s contractionary policies to fight inflation.
- Q1-Q4 1991: Gulf War I.
- Q4 1998 & Q1-Q3 1999: Russian Crisis and Long Term Capital meltdown.
- Q1-Q4 2003: 9/11, dot com bubble burst, Gulf War II.
- Q1-Q4 2009: Financial Crisis.
The question we want to answer: what’s a normal number of positive +1% days in a recovery? Here’s what we found in the 4 quarters coincident with and after a major low in US equities:
- Average number of up 1% or greater days in the first quarter post-trough: 14
- Second quarter post-trough: 15
- Third quarter post-trough: 11
- Fourth quarter post-trough: 9
And here is the 2020 record to date:
- 12 positive +1% days in Q1 (S&P 500 low was on March 23rd).
- 18 positive +1% days so far in Q2 with still 19 trading sessions left to go.
Our 2 investment takeaways from this data:
#1: Throughout a recovery after a bottom in US stocks from a major macro catalyst the number of positive +1% days tends to remain above average over the next few quarters. The average here is 9 to 15 respectively. To put this in perspective, the average number of +1% days to both the upside or downside is 13 a quarter over the last 6 decades. Fourteen or 15 solely positive +1% days in the first and second quarter post-trough therefore highlights the heightened level of volatility that remains after stocks bottom. That said, positive +1% days are less common in the third and fourth quarters after a trough to an average of 11 and 9 respectively.
This trend mirrors a clear pattern of both +/- 1% days over the last +60 years. 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: The S&P 500 reached its low back in March, and registered 12 “up more than 1% days” versus the average of 14 during the first quarter after a trough of our 5 reference periods. That said, it is making up for it this quarter with already 18 positive +1% days. This is not dissimilar to 2009 when the S&P hit 16 positive one percent days in Q1 (when the S&P also bottomed in March of that year). It also had 20 positive +1% days in the second quarter, which the S&P is currently just two away from for this quarter as of today.
The third and fourth quarter averages off a bottom for our 5 reference periods were 11 and 9 respectively, but higher at 15 and 11 for 2009. This tells us that we could still see an elevated number of positive +1% days next quarter as well, but it should be lower than what we’re seeing in Q2 and abate towards year end.
Bottom line: positive +1% days like today mean stocks are confident that fiscal and monetary policy have been appropriate and the US’s reopening will be largely successful. Worth noting: the annual total returns for the S&P in the recovery years we referenced were all up by at least +20%.