StockWatch
Choppy Waters?
Recent stock market volatility certainly seems extraordinary.
Approximately half of the trading days in November and December have witnessed big daily changes. During the calendar years 2005 and 2006, in contrast, fewer than three triple-digit change days occurred in the average month.
A careful review of the historical record, however, teaches us that recent volatility isn’t all that out of the ordinary. There have been numerous other periods in U.S. stock market history when the market’s day-to-day changes were far bigger than what we’ve experienced lately.
The first reason this isn’t well appreciated is that our memories are short. We were spoiled by the stock market’s relatively calm and civilized advance in 2005 and 2006. As a result, many were seduced into thinking that was normal.
It wasn’t.
Another reason that many mistakenly think that recent market volatility is unusual: We focus more on the number of DJIA points gained or lost than we do on the percentages those points represent. With the stock market so much higher today than in prior decades, it can look as though we have more volatility today when, in fact, we don’t.
When I started the Hulbert Financial Digest in 1980, for example, the DJIA was at approximately 800. A 1 percent change, therefore, would have amounted to a measly 8 points. A similar percentage gain or loss today would amount to more than 130 points.
Needless to say, however, a percent is a percent.
Dutifully focusing on percentage changes, therefore, I compared recent volatility with what prevailed at other periods back to the DJIA’s creation in 1896. It turns out that recent choppiness doesn’t even come close to being a record.
I first measured the frequency of trading sessions in which the DJIA rose or fell by at least 1 percent -- which over the last couple of months has averaged 11 times out of every 20 trading sessions (a period that amounts to approximately one calendar month). Lest you think that’s a high frequency, consider this: There have been nearly two thousand 20-day periods since 1896 in which there were more than 11 days with percentage changes this large.
What if we focused on changes of at least 2 percent? In the last couple of months, we have averaged approximately three such days per every 20-trading-day period. Well, when measured this way, recent volatility is even less extraordinary -- there have been nearly five thousand 20-day periods since 1896 in which there were more 2 percent change days than we’ve experienced recently.
From at least one perspective, the market’s relative calm of late is disappointing. Had recent volatility been at record levels, we would have been able to draw some mildly positive conclusions about the stock market’s near-term prospects. That’s because the market, historically, has tended to perform better following periods when there were many days on which the market rose or fell by at least 1 percent.
But, because recent volatility isn’t at record levels, we can’t even draw that mildly positive conclusion.
Instead, all an historical perspective can provide us is the solace that our senses are misleading us: Recent market gyrations might feel like a roller coaster ride, but, in fact, they are not all that unusual.Mark can be contacted via email at mhulbert@marketwatch.com.
