Continuing yesterday’s “Markets” discussion, which analyzed current S&P 500 price volatility to prior periods of investor uncertainty since 2005, today we have the same data but for the Russell 2000. By way of brief review:
- We measure price volatility by looking at the standard deviation of daily returns over the prior 100 days.
- In the case of the S&P 500, that averages to 1.0 percent over the long run, which simply means that any day where the index’s return is +/- 1 pct or less is “normal” (within 1 standard deviation). If the S&P is +/- 2 percent in a day (as it has been recently), that’s pretty unusual (2 standard deviations). When the S&P is up or down 3 percent or more in a single day, you know you are in unusually choppy markets (3 standard deviations).
- The Russell’s standard deviation of daily returns since 2005 is 1.38 percent, more than the S&P 500’s 1.0 since small caps tend to be riskier than large caps.
The chart below shows the Russell’s 100-day trailing standard deviation of daily returns back to 2005. We have noted the 1.38 percent average as well as the most pronounced periods of high volatility.
This chart’s simple message is that the Russell’s current volatility is anything but normal. The current 100-day standard deviation of price volatility of 1.72 percent is well above the long run mean of 1.38 percent as well as late 2018’s 1.45 percent. The only periods where price volatility have been higher were around the 2008 Financial Crisis and its aftermath and the 2020 Pandemic Crisis. On the plus side, the Russell is nowhere near as volatile as those periods of true crisis.
Takeaway: while the Russell may enjoy a near term snapback since current volatility, indicating high levels of investor unease, is so high this is likely more of a short-term trade than a longer-term trend. US small caps are very levered to high yield corporate bond spreads since many companies in the Russell are unprofitable and need ready access to affordably priced external capital. HY spreads have widened in recent weeks, true, to 4.71 points over Treasuries. But … They are not yet back to the +5 point levels of late 2018 let alone the +7 points of prior investable lows (2001 – 2002, 2009, 2011, 2016, 2020) where the Russell showed true outperformance versus US large caps.