Volatility is defined as “the degree of variation of trading price series over time” and is often synonymous with general stock market risk. If volatility is increasing, investors can expect their returns to fluctuate a great deal more, usually to the downside. Last year is a great example of high volatility; there were 23 days in which the S&P 500 posted a single day return greater than 2% and 23 days in which the S&P 500 posted a single day return worse than -2%. In total, 46 days of +/-2% change in price. Looking at the chart below can help put that number in context.
2022 produced more volatile days than the 2020 Covid pandemic, more days than in 2011 when the US lost their triple A credit rating while a European debt crisis loomed, but just less than 2009. The expectations for 2023 were more of what 2020 and 2022 had to offer. And, considering what the economy has challenged with – interest rates, inflation, debt ceiling, chances of a recession around the corner, it seemed like a realistic expectation. But as I’m sure you noticed already in the chart above, stock market volatility has been nearly non-existent.
There have only been 2 days this year in which S&P 500 returns have been +/-2% in a day, as of June 30th. Compared to last year it’s certainly a breath of fresh air! The BlackRock chart also provides a look at average market returns during volatile years (more than 10 days of +/-2% trading days) and years with low market volatility (10 days or less). The contrast is stark; the low volatility years have averaged a 17.1% return where the volatile years have averaged only 0.3%.
Like I mentioned above, volatility is usually greater when there is added downside risk in the markets resulting in more or bigger down days. This could explain the average returns on the right side of the chart.
The markets have continued to trend upward, and we are thrilled with the comeback after a tough 2022. PDS is continuing to monitor client accounts and the broader market for rebalancing, tax loss harvesting, and other areas of opportunity. We hope everyone is having a wonderful summer and the sunny weather continues!
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