Since I began working in the financial services industry in 1987, I’ve noticed that investors seem to continually feel that the current stock market has been more volatile than it was in the previous five or 10 years. This thinking was brought to my attention once again recently when a client indicated that they felt like the stock market today was more volatile than it has been in the past. I agreed that it sure feels that way. But is it really?
I decided to do some research, and I was a little surprised at what I found.
Today it’s not uncommon to have the Dow Jones Industrial Average, a measure of large U.S. company stocks, swing up or down 100 points in a day. In fact, it’s not uncommon to have moves of 200-300 points in a single day. That sounds volatile, right? However, when we dig deeper we find there is more to the story.
In the chart below I looked at each decade starting in the 1930s and outlined the number of days that the stock market rose or fell more than 1%. What you notice is that since 2010 the number of such days is actually lower than during the previous four decades (1970-2009). So far this decade 11% of the days have been up more than 1% and 9% of the days have been down more than 1%.
I also looked at days when the index rose or fell 2% or more. The results below show that stock market volatility since 2010 has been quite similar to past decades.
If current stock market volatility is similar to that of the past, why does it feel so much more volatile? The reason is actually quite simple. The index is much larger now, so a 1% move up or down represents a far greater number of points. As you can see in the chart below, on the first trading day of 1980 the Dow closed at 825. One percent of 825 is 8.25 points. Since then the stock market has climbed. By June 15, 2018, the index was up to 25,090. One percent of 25,090 is 250.9 points. So, if the stock market, as measured by the Dow, is now at 25,090 and falls 250.9 points, that is the same as an 8.25-point drop in 1980.
Investors hardly notice days when the Dow drops 8 points now, so naturally when it drops 250 points they feel like volatility has gone sky high by comparison. As you can see, in order to measure volatility, we need to look at the percentage increases and decreases as opposed to the point increases and decreases to get an accurate impression.
Volatility since 2010, as measured by a daily drop or gain of more or less than 1%, has actually been lower than it has been compared to many past decades. Consequently, there is no reason for alarm.