US equity volatility is back – as shown by recent market action – after a protracted period of unusual calm… In the third quarter of 2018, the S&P 500 did not rise or fall by one percent or more – our preferred measure of volatility – during any given trading session. That has only happened during 5 other quarters since 1958 (first full year of data). Volatility came roaring back in the current quarter, however, with the S&P 500 even declining by over 3% last Wednesday. Plus-three percent moves to the downside are pretty uncommon, with just 98 such events since 1958.
We gave you a heads up earlier this month, noting how October typically shows the most volatility of any month throughout the year. To quickly recap, October has experienced a down +3% day (our measure extreme volatility) the greatest number of times (18 including this year) versus other months since 1958. The VIX has also peaked the most during October (5 times) aside from August (also 5 times) since it was created in 1990.
Since we are clearly playing catch up on the volatility front, here are some other statistics that help frame what to expect for the rest of 2018:
- The S&P 500 typically falls or rises by over 1% during 53 trading sessions a year on average. Those one percent days get spread out pretty uniformly throughout the year, but Q4 slightly bests the other quarters: 13 one percent days in Q1, Q2 and Q3 respectively versus 14 on average in Q4.
- So far this year, there have been 41 one percent days including today. Five of those days came in just the first 3 weeks of October compared to the Q4 average of 14 (dating back to 1958). In other words, quarterly US equity volatility is already almost half way to its average with well over two months to go in the quarter.
- The S&P 500 has had a daily drop of +3% or more 11 times in November over the past six decades. Not has high as October (17), September (13), or August (12), but more than the balance of months (3-9 times). These outsized moves rarely happen in December (3), so we expect to see most volatility the rest of this year occur this month and next.
Since October shows volatility is picking up, what does that mean for the rest of the year? A few points here:
- There are six years in which the S&P has had daily declines of +3% in October (and some years had a few down days of at least 3% in the month): 1982, 1987, 1989, 1997, 1998, and 2008. During these years, the average price return for October was negative 4.3% as the S&P fell two-thirds of the time. That said, the S&P finished in the green two-thirds of the time the next month with the exceptions of 1987 and 2008; the average return was basically flat, or slightly down 0.07%. Without the two outliers, the S&P was up an average of 3.9%.
Moreover, volatility near the end of a calendar year does not necessarily squash all the year’s gains. The average total return for these six years is +13.8%. The only year it was down was in 2008 (-36.6%). Even 1987 ended the year up 5.81% on a total return basis.
- Remember that volatility happens to the upside as well. During the years when the S&P had a daily drop of 3% in October, there was an average of 5.7 days when it posted moves greater than one percent to the downside in the same month, but also 6.7 days to the upside. Similarly, the next month (November) saw an average of 4.5 days when the S&P fell by one percent or more compared to 4.2 days to the upside.
In sum, the S&P’s returns this month and year are in keeping with the trends we’ve outlined: the S&P is down 4.7% on the month, but still up 3.6% YTD. We’re not ready to throw out our positive view on US stocks through the balance of this year, but we expect more choppy days like today especially through next month. The third quarter was unusually quiet, while Q4 is likely to make many more waves.
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