Thursday, September 1, 2022
So far, 2022 has not been kind to investors with most major stock markets, including the S&P 500, incurring heavy losses and entering bear markets. It has felt like an incredibly volatile environment so today we take a closer look at exactly how it compares to historic data.
“The stock markets this year have felt like a rollercoaster so it’s no surprise that the data shows it has been one of the toughest and most volatile on record” explained LPL Financial Portfolio Strategist George Smith “In fact, intraday stock market swings of over 1% have been occurring at a frequency bested in the past 40 years only by the Great Financial Crisis and DotCom bubble bursting”
While the Volatility Index (VIX) has not reached levels seen in prior market dislocations (it peaked around 36) other measures have seen extreme values. As shown in the LPL Chart of the Day, the S&P 500’s frequency of intraday volatility, as measured by swings over 1%, has been extremely elevated, with 87.3% of all days so far this year seeing such wide trading ranges. This is the highest incidence of such large intraday ranges since the major market dislocations that occurred in 2008 and 2002. Even 2020, when the prior bear market happened, saw only 62% of trading days see such large intraday swing.
Looking at weekly returns data tells a similar story. So far this year we have seen a very elevated number of instances of the weekly return (positive or negative) being greater than 1%. There have been 27 occurrences year-to-date, which if extrapolated out would yield about 42 by year end, this would be the most in a year since 1998. Unfortunately for investors the majority of the weeks with big returns so far this year (unlike in 1998) have been down weeks. 18 weeks so far in 2022 have seen negative returns of greater than 1% (compared to only 9 weeks with gains greater than 1%). A full year with that amount of big down weeks would rank among worst quintile going back to 1928 but if this year continues in the same fashion it could end up as the worst since the great depression in this respect (and none of the depression years had more than 17 big down weeks by the end of August).
This tough environment for the stock market is illustrated again by the percentage of days on the S&P 500 that have yielded gains so far this year. At just 44.6% it’s the lowest value since 2002. If this persists through year-end it will be only the 8th time this has been under 45% and well below the average of 52%.
This market data appears to be suggesting that that many market participants are behaving as though we are in the midst of a Great Financial Crisis, DomCom Bubble Bursting, or even Great Depression-type recession. We do not believe this to be the case and still see the risk of a mild recession at around a coin toss for 2023. While there is certainly the potential for more volatility, we think the S&P 500 still has the potential to see gains by year-end, driven by earnings and some multiple expansion as inflation potentially starts to settle down, which would in turn give the Federal Reserve (Fed) cover to slow down their tightening of financial conditions. This should be sufficient to push stocks higher, consistent with historical strong rebounds from shallow bear markets and midterm election year lows. Risks to our view are that the Fed tightens too far, too fast or that inflation does not slow as we expect. Possible broader military conflict in Europe and U.S-China tensions present additional outlier risks.
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All index and market data from FactSet and MarketWatch.
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