Pay Attention to All Cries of Wolf aka Market Volatility
George Soros ... “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”
Peter Lynch … "Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and mutual funds altogether."
I quote the above primarily to remind myself that investing is a challenge which has been an integral part of me for over three decades. To say that Stock Markets have been extremely volatile in 2020 is to state the obvious.
This year 2020 in particular has been very unique. After a good start during the first 6 weeks of the year, the Covid crisis which is essentially a medical emergency got reflected into poor Stock Market conditions. Appetite for risk plummeted across the whole spectrum during the month of March. The pandemic virtually made stock market participation a highly sick activity.
The stock market recovery started from the second quarter of 2020 and has been progressing in fits and starts which is quite normal when markets get stung sharply. Every rally is viewed with suspicion and any pullback is considered as almost fatal.
It does make sense as part of due diligence to regularly measure stock markets volatility and performance and place it in appropriate historical context.
Using the end of 3rd Quarter which is Sep 30 2020 as the starting point, it is worthwhile computing and analyzing monthly returns over the past 15 years and tabulating it on a yearly basis as given in Table-1.
Table-1 … Market Volatility From 2006-2020
|
Date |
S&P 500 Index |
One Year Return % |
Average Monthly Return% |
Std Dev of Monthly Return% |
|
2020/09/30 |
3363.00 |
12.98% |
1.24% |
6.83% |
|
2019/09/30 |
2976.74 |
2.15% |
0.31% |
5.42% |
|
2018/09/30 |
2913.98 |
15.66% |
1.25% |
2.63% |
|
2017/09/30 |
2519.36 |
16.19% |
1.27% |
1.55% |
|
2016/09/30 |
2168.27 |
12.93% |
1.08% |
3.60% |
|
2015/09/30 |
1920.03 |
-2.65% |
-0.18% |
3.17% |
|
2014/09/30 |
1972.29 |
17.29% |
1.37% |
2.52% |
|
2013/09/30 |
1681.55 |
16.72% |
1.33% |
2.63% |
|
2012/09/30 |
1440.67 |
27.33% |
2.11% |
4.00% |
|
2011/09/30 |
1131.42 |
-0.86% |
0.00% |
3.97% |
|
2010/09/30 |
1141.20 |
7.96% |
0.78% |
5.51% |
|
2009/09/30 |
1057.08 |
-9.37% |
-0.47% |
8.55% |
|
2008/09/30 |
1166.36 |
-23.61% |
-2.13% |
4.27% |
|
2007/09/30 |
1526.75 |
14.29% |
1.15% |
2.40% |
|
2006/09/30 |
1335.85 |
8.71% |
0.71% |
1.88% |
We are using the S&P 500 Index as our Benchmark for measuring the performance and volatility of the stock market. We downloaded the closing values of the Index for the past 180 months in order to get a perspective of how the index has behaved over the past 15 years.
The one year return as of Sep 30 2020 is 12.98%, computed by just taking two values of the index, whereas the next column gives us the average of the monthly return% computed over the past 12 values of monthly returns. Hence the first is based on just 2 values whereas the next is based on 12 points of data.
The last column is the Standard Deviation of the Monthly Returns based on the past 12 values of monthly returns. Standard deviation of monthly returns gives us a very good idea of how volatile the markets have been over the past 12 months. Higher the market volatility, a high value of standard deviation is the consequence.
It is clear that the current level of market volatility at 6.83% is the highest since the 2008-2009 Financial Meltdown which had registered a value of 8.55%.
Also it is worthwhile to note that this high value of 6.83% is among the top 5 high values over the past 70 years, as reflected in Table 2 which is an extract from the period 1950-2020.
Table-2 … Top 5 Market Volatility Values From 1950-2020 As Of 09/30
Date
|
|
S&P 500 Index |
One Year Return % |
Average Monthly Return% |
Std Dev of Monthly Return% |
|
2020/09/30 |
3363.00 |
12.98% |
1.24% |
6.83% |
|
2010/09/30 |
1141.20 |
7.96% |
0.78% |
5.51% |
|
2009/09/30 |
1057.08 |
-9.37% |
-0.47% |
8.55% |
|
1999/09/30 |
1282.71 |
26.13% |
2.03% |
4.19% |
|
1998/09/30 |
1017.01 |
7.36% |
0.76% |
5.84% |
|
1989/09/30 |
349.15 |
28.41% |
2.16% |
3.55% |
|
1988/09/30 |
271.91 |
-15.51% |
-1.08% |
7.87% |
|
1976/09/30 |
105.24 |
25.48% |
1.98% |
3.99% |
|
1975/09/30 |
83.87 |
32.00% |
2.55% |
6.97% |
The end of the 3rd Quarter in any given year is usually a good synchronization point for the Stock Market. It gives a reasonable idea how corporations have performed over the major part of the year and also opens a window to earnings estimates for the coming year.
For whatever it is worth it is pertinent to observe that the year following the highlighted years of extreme volatility have been positive years with a minimum return of 7.96% in 2009-2010.
Though past performance is no guarantee of future results it is not unusual for markets to stabilize after extreme shocks.
Hence measuring and monitoring key stock market metrics enables us to deal with the volatility which is inherent in any investment activity.
It would be beneficial to keep in mind the statement of Charlie Munger the legendary investor, a partner of Warren Buffett … “A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. You need to keep raw, irrational emotion under control.”
