Large Daily Swings Reflect Structural Changes

The charts below illustrate the number of +/-3% and +/- 2% days in the S&P 500 Index by decade from 1950 through 2019. The decade from 2000 through 2009 clearly stands out as we experienced two drawdowns in the S&P 500 of more than 40% in a single decade.

markets have experienced more volatility since 2000 than the previous 5 decades combined

We are on pace to exceed the average from 1950-2000 by a significant margin. The overall trend is clearly up. A growing consensus holds that large daily swings, such as those that reappeared at the start of 2016, are more structural than temporary. One reason for higher structural volatility may be technology that has interconnected markets and increased the velocity of trading. When investors decide to de-risk portfolios at the same time, the result can be like a game of musical chairs in which each investor seeks to avoid being the last to hold an unwanted asset.

While technology gives investors better, faster information and the tools to respond, it also creates a transfer mechanism for volatility through algorithmic-based trading. This can lead to a scenario whereby a scare in one corner of the market can quickly spread and intensify.

Other forces driving market volatility include the effect of banking regulations that reduce the amount of capital committed to securities trading and liquidity and rebalancing by leveraged and short exchange-traded funds (ETFs).

Return to the Volatility Guide


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