Another day, another 3% lurch . . . this time to the downside. It’s definitely getting wild on Wall Street. But is the rollercoaster ride getting too intense for shareholders trying to hang on?
Statistically, we expect the S&P 500 to gyrate about 1.3% a session between the intraday high and the low. That’s “normal,” the limit of the random walk that stocks will collectively make in any given day.
But very few days on Wall Street are ever really average. I tend to look at probabilities and trading ranges, and on those terms, about half the time, the S&P 500 moves somewhere between 0.9% and 1.7% from day to day.
Under typical market conditions, that’s the level of volatility we see about 2-3 days in any given week. Another day will be unusually calm, with the big benchmark moving less than 0.9% . . . and the last will be unusually wild.
We like the quiet periods because the natural direction of the random walk is up. The unusually wild periods tend to push the market down, which is why the volatility index isn’t often called the “greed” index. And in the middle, the S&P 500 statistically climbs a net 0.75% in any given month.
That’s great . . . under typical market conditions. But lately, I don’t need to remind you that market conditions are under a little strain. So far this month, the average intraday swing has clocked in around 2.0% . . . well above the 1.7% that counts as the high end of normal.
In months like this where we see the random walk speed up, stocks move lower a little more than half the time. However, they also end up a little less than half the time.
Either way, what distinguishes these wild months isn’t the direction so much as the size of the steps. Big steps from day to day tend to add up to big swings across the weeks . . . and the result is that an end-to-end gain or loss of 5% isn’t unprecedented.
Factor that number against the quiet 0.75% glide we get in a “normal” month and it’s clear that we’re right in the rollercoaster zone now. A volatility spike tends to bring a 5-10% lurch to the downside. Then, even a partial rebound goes a long way in the other direction.
As I write this, the S&P 500 is down 11% so far this month. If we enter July with these losses, it’s statistically unusual, to say the least . . . a partial bounce is a lot more likely.
Options traders and short-term swing strategies can take advantage of a bounce like that and turn a sad month for buy-and-hold investors into something lucrative. We do that all the time across my universe. Seasons like this are really just another day at the office.
But if you’re a buy-and-hold investor, you have a right to be tired and even a little frustrated. May was even worse from a day-to-day volatility perspective, while April was only a tiny bit better.
We haven’t seen anything like a “normal” month since March, and even it pushed the limits of the bulge bracket. Before that, the market hasn’t really gotten much of a rest since December.
I have to ask here whether December made your stomach lurch at all. If it did, you’ve lost your nerve for watching the market day after day. Unplug. Come back every couple of months and review your holdings.
If December was a wild ride to you, you’re always going to be nervous when confronted with the usual Wall Street churn. That’s no way to live. You can be a long-term investor . . . but you don’t need the stress of watching the market swing.
Because while this year has started in an extended burst of volatility, we’re still nudging around the low end of what a really wild ride looks like. March 2020 was truly off the charts, with stocks swinging an average of 5.0% every day.
Lately, volatility hasn’t even approached half that rate. Another six months of this will mean living through an entire year of what we all endured back in April 2020, when the Fed was throwing trillions at the market to soothe the aftershocks from the COVID crash.
I don’t think we’ll see six more months of this tension. One way or another, things will calm down . . . at least a little, enough to drive the statistics back to the high end of normal.
Remember 2020? Across that entire year of shocks, the random walk only added up to roughly what we experienced in March and April of this year . . . and that year ended up huge for the market. No guarantees! But if you can handle the ride, the destination can be good after all.