Time Dependency of Volatility

Last year was certainly a smooth ride in the markets for investors.  Both the Dow and S&P 500 were up north of 20%.  Volatility was low.  But it’s not until you dig into the numbers that you realize what an outlier of a year 2017 was.

S&P 500 Index Realized Volatility by Quarter since 1990

Volatility chart

Source: Horizon Investments


Here are some data points to consider from last year:

  • Going back to 1990, we had 4 of the 7 least volatile quarters on a realized basis
  • Lowest realized volatility for the year since 1964
  • Lowest average daily VIX on record. 09.  Compare that to the historical average of 19.5
  • Lowest max drawdown since 1995. You could’ve invested in the S&P 500 last year at any point and not lost more than 2.8%

Quite a year to say the least.  Now when we compare 2017 to 2018 Q1, we see a complete market shift.

SP 500 Daily Range

This chart shows how range bound the daily returns were for 2017.  In fact, there were only 4 days last year that lost more than 1%.  By contrast, we had 11 days through the first quarter of 2018 that lost more than 1%.

However, my biggest takeaway from the first quarter is not all the fluctuations we saw, but how volatility is time dependent.  For all the hoopla we saw, the total return for the S&P 500 was      -0.76%.  Not every client watches CNBC every day.  If all of your clients do, God help you.  But for those clients who don’t pay attention to all the headlines, consider this: they have just received their quarterly statements and saw that, depending on their allocation, are virtually flat.  For those of us neck deep in this stuff daily, we see and feel the shifts in the market.  Just don’t make the mistake of proactively projecting any personal anxiety you may have about the market onto your clients – they will certainly pick up on that.

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