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The first half of this year was about as good as an investor could have asked for. Not only did the S&P 500 rally ~15%, but it did so with extremely low volatility. Now, this came on the heels of a remarkable rally during the last two months of 2023. Except for a few weeks of volatility in April, it was pretty much smooth sailing for eight consecutive months. The market seemed to rally on any piece of economic data, good or bad, as the S&P 500 generated positive returns each month minus April. Volatility became a distant memory as markets seemingly achieved record highs on a weekly basis. Then a funny little thing happened when least expected: Volatility surged.
Over the past three months, the S&P 500 experienced three separate sell-offs ranging from -3.5% to -8.5%! Not only that, but there were multiple weekly declines, which caught many investors off guard. Once again, this led to worries about whether a crash was around the corner.
Now, I get it: The global economy has been cooling, led by a slowdown in consumer spending. In addition, while still healthy, the U.S. labor market shows signs of weakness. These headlines are the main culprit for the recent spike in volatility, as some fear that a potential recession is on the horizon. This has led the market to overreact to each headline and piece of economic data to help decipher where things stand.
As we know by now, reacting to headlines is never the answer. What’s sometimes forgotten is that markets are volatile and generally experience multiple 5%-plus declines throughout the year. We’re to a point where it’s bizarre if that doesn’t take place.
VOLATILITY
This brings me back to volatility. While it has picked up over these past three months, April still remains the only down month this year. So, while volatility has increased, the monthly gains have continued, and as of this writing, the S&P 500 is at all-time highs.
As mentioned, extended periods of muted volatility are uncommon. As seen in the chart above, daily volatility through the first six months of 2024 was nonexistent. We experienced only one trading day when the S&P closed with a gain or loss greater than 2%. Since then, there have been four—and a total of nine trading days with a gain or loss greater than 1.5%. That is pretty remarkable. The reality is this year is shaping up to be a pretty standard year from a volatility standpoint.
As seen on the chart below, the S&P 500 has experienced intra-year declines of at least 10% in 12 of the past 18 years (~67%). Even more, there have been intra-year declines of 15% or greater in ~40% of these same years!
Honestly, what’s more abnormal is the S&P 500’s largest decline from November through June was a paltry 5.3%. It should be noted that this decline was fully recouped in a mere three weeks. A 5 to 10 percent correction is almost a certainty every single year. We need to remind ourselves of this and not worry about each one. Case in point, dating back to 1928, the S&P has finished the year with a positive return in 70 of those 96 years (~73%)! Even more, the S&P finished with double-digit gains in 56 of those same years (~59%).
Seems pretty easy, right? Just keep your money invested and watch the returns roll in. Well, it’s not that simple. In nearly half of the years in which the S&P finished the year up double digits, there was a double-digit correction during that same year.
What does all this mean? Volatility is part of the investing cycle and should be expected. In fact, I am more troubled when markets shoot up in a straight line unabated, as that generally means a larger, more fierce correction is likely at the first sign of economic weakness.
Now, I will admit that markets are somewhat back to adopting the “bad news is good news” mantra that has been employed for much of the past decade. The rationale is that a semi-weak economy means more intervention by the Fed, which is largely viewed as a positive backdrop for equities as it can help spur economic growth while making cash, CD, and high-yield saving rates less attractive. While this “strategy” has worked pretty successfully, this time is somewhat different. The Fed is extremely unlikely to cut rates in an overly aggressive fashion, as that would risk re-stoking inflation, something we’re finally climbing out of after two long hard-fought years. Plus, if the economic data were to get extremely weak, rate cuts would not solve much, as it takes several quarters for those to work their way into the global economy.
In the end, no one truly knows what lies ahead. But one thing I do know is that volatility will never go away. It’s part of investing, and figuring out how much you are willing to take is the name of the game.
As always, stay the course and stay invested.
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