I’m not sure precisely when it happened, but when it comes to the stock market, we’ve all kind of become grumpy old men.
Just like the old-timers, we sit around grumbling that everything used to be better in the good old days. The markets were kinder, gentler places where you could enjoy a nice stroll, where your kids could play, where everything was calm and safe. “We didn’t have all this crazy volatility,” we gripe. “You didn’t have to run away scared and hide under your bed every other day.”
The past few years have, indeed, made us all jittery about the market’s occasionally wild mood swings. But while we may fear volatility more than we used to, it doesn’t mean there is actually more volatility to fear.
Measuring the volatility waves
Craig Basinger, chief investment officer at Macquarie Private Wealth in Toronto, recently looked at the volatility of the Canadian and U.S. stock markets over many decades, to see whether stocks really have been unusually volatile over the past few years. Rather than look at daily fluctuations – which should be largely meaningless to most retail investors – he examined the rolling five-year standard deviations of the monthly returns on the S&P/TSX composite and the S&P 500. (A standard deviation is a measure of how much the returns vary around the average; higher standard deviations reflect greater volatility.)
Going back to 1930, he found that the past few years have shown elevated volatility levels – but hardly to extreme or unusual levels. While the current levels are toward the high end of the typical volatility range over the past 40 years, TSX volatility is well below the levels seen in the early 1980s, or even as recently as a decade ago. (For the S&P 500, current volatility levels are ever so slightly above the mid-to-late 1980s and early-2000s peaks.) The volatility in the current cycle is also far below the extremes of the Great Depression.
Accentuate the negative
Mr. Basinger considered that maybe our heightened perception of volatility didn’t come from just any price swings, but specifically from sharp declines. “After all, nobody minds if the TSX returned 10 per cent more than the average,” he said.
So, he looked at the numbers again, this time focusing on only downside volatility – the five-year rolling standard deviation of months with negative returns relative to the average.
He again found that for the TSX, downside volatility is elevated, but still within the range of the past several decades, and below the highs of the early 1980s and the early 2000s. S&P 500 downside volatility is a touch higher than its peaks of the late 1980s and early 1990s, representing historic highs.
“So the numbers indeed support the feeling that we are investing in more volatile times,” he concluded.
True. But at the same time, it’s not like we haven’t seen this before.