Scale and Context for This Week’s Dip

Volatility reared its head this week, with most observers arguing Fitch’s (allegedly strange) downgrade of the US Treasury’s credit rating hit stocks hard. All day Thursday, headlines used words like “sink,” “shockwaves,” “plunge,” “sharpest” and pretty much any other colorful word you can think of to describe the late-week dip that began Wednesday. To us, it seemed out of step with the S&P 500’s actual price movement, which amounted to a -1.4% drop Wednesday, -0.3% Thursday and -0.5% Friday.^[i] Wednesday was the first daily drop below -1.0% since May and the first move greater than 1% in either direction since the end of June, so we guess we can see how it seemed big compared to July’s chronic incremental moves. But still. Moves this big and even larger aren’t uncommon during bull markets, so to us, headlines’ tone seemed exaggerated.

To help illustrate this, consider weekly S&P 500 price returns since 1928, when daily return data start. The index was close to flat on the week when Fitch’s announcement hit, so this seemed the best way to compare this burst of volatility to history.

Since data begin, the magnitude of the S&P 500’s average weekly movement in either direction is 1.75%.^[ii] This week’s move, at -2.3%, is higher, but is 0.55 percentage point really worth the strong verbiage?^[iii] It strikes us as average. Not huge. Not deserving of the thesaurus treatment. Just plain Jan Brady average.

Compared to all volatility, at least. What about compared to its fellow weekly drops, taking big up moves out of the mix? Well, among negative weeks since 1928, the median drop is -1.85%.^[iv] That means this week is still firmly in the vanilla oatmeal category, in our view.

So why the headline hype? We have a couple guesses, recency bias being one. A stretch of small moves makes even a pretty average one seem big by comparison when it strikes. The calendar probably also has something to do with it, though. If you have tuned in to MarketMinder throughout the week, you might have seen us bemoan the arrival of August and the traditional slow-news “silly season” in financial and overall world news. When politicians are on vacation and earnings season has mostly wrapped, there just isn’t a lot of fodder for colorful copy. Heck, The Wall Street Journal even resorted to publishing the requisite annual September is the stock market’s worst month piece today, August 4.^[v] This month just started! September is nearly a month away! Wouldn’t late August be more apropos? You can probably blame the August news drought for the fact that we are even writing this article. It is very much a make-your-own-fun time of the year.

Keep this in mind as we grind through these dog days and things that ordinarily wouldn’t be news gain a boatload of column inches. Dismissing everything you see would be an error, as important things can still happen in August. But applying an extra-critical filter can help, especially if the news comes with hyperbolic language. Maybe it really does matter, or maybe commentators are struggling to find anything worth covering. Either way, remember to scale, scale, scale and consider context—that is true no matter the month.