Over the past several weeks, it seems like a regular occurrence to have changes of 3-4% of the S&P 500 in one day. After having mostly low volatility for the past several years, investors are asking if this is the new normal.
First, what is meant by stock market volatility. Volatility is the range of price change of over a given period of time. Low volatility occurs when prices stay relatively stable. High volatility occurs when prices change quickly and erratically with rapid rises and falls.
The chart below shows the daily change in percentage of the S&P 500 for a 38-year period from 1990 through 2018. The middle of the chart, between the 2 gray lines show changes of about ±2%. This is where 95% of all daily percentage changes fall. Changes of more than ±3% happen about 2% of all trading days. Over this 38-year period a 3% change happened 198 times. Changes of greater than 5% occurred less than 1% of the trading days but still it was 40 times.
At Prato Capital Management, we believe history should be our guide through turbulent times like today. History has shown that volatility like we have seen the past few weeks is unusual but happens and should settle down over time. We are not predicting when but like most things, everything returns to averages and means over time.
“The four most dangerous words in investing are: ‘this time it’s different.'” – Sir John Templeton.
