The Surprising Truth About This Year’s ‘Volatility’

In just four short months, big headlines have barraged investors. The year began with the Georgia runoffs and Capitol insurrection, stirring political fears galore. Then came COVID waves, variants and Europe’s vaccine hiccups. The GameStop trading frenzy. Last month’s Archegos hedge fund collapse. Interest rates’ surge. Tax hike fears. The jam-packed news cycle may give you the impression markets have been unusually rocky these last few months. But no. Rather than outsized volatility, stocks have kept their cool—a timely reminder for investors to tune down attention-grabbing events, in our view.

In terms of daily stock swings, 2021 has been relatively calm. Since 1928, when daily data begin, the S&P 500 has moved up or down by 1% or more on 34% of trading days.^[i] In 2021 so far? Just 30%, or 24, with only 3 daily moves bigger than 2% (up or down), far lower than the historical average of 11%. No daily percentage swing has exceeded 3% up or down this year. Globally, a similar story holds. For the MSCI World Index, daily moves of 1% or greater in either direction occur 23% of the time since daily data start in 1980. That is a right around this year’s 22% (17 days), but this year has seen far fewer days swinging more than 2%.^[ii] There have been just two.

Perhaps even more tellingly, most of those bigger daily moves have been up. Big down days—more than -1% declines—have been notably absent. Only 9 daily S&P 500 declines have exceeded -1% this year—11% of trading days, below the 17% historical average.^[iii] For MSCI World, there have just been 6 to date in 2021, or 8% of trading days.^[iv] The average is 11%.

The combination of placid markets and seemingly tumultuous headlines highlights a couple of key investment lessons: One, no event has a pre-set market impact. Most often, stocks are very good at looking beyond the headline news—particularly those events that have garnered major media attention for a long time. We categorize the ongoing battle against COVID here. Markets are well aware that the pandemic isn’t over and won’t be for a substantial period. Yet forward-looking stocks are likely looking well past this, considering that has been widely known for some time.

Second, don’t let the frequency of headlines and hype around a story persuade you it is all that huge for markets generally. Here we are thinking of Archegos and the GameStop saga. They were definitely “new” news in Q1, but despite being (arguably!) fascinating and market-related—fodder for great financial headlines—they lacked anything resembling the scope to affect broad markets materially.

Now, while we remain bullish and expect this year to go well when all is said and done, we fully expect some short-term chop along the way. That is routine for markets. If there is, don’t assume something big and bad is approaching—a notion we think long-term investors should accept. Volatility can always strike for any or no reason. The existence of volatility—or the lack of volatility—doesn’t predict more volatility ahead, either. Volatility is ... volatile.

Even in these more optimistic times, it isn’t hard to envision some folks reacting to volatility in counterproductive ways. During a rough patch, you could easily lock in losses by taking action. Then, getting back in can exact an additional emotional (and financial) toll if markets rise in the interim. In our experience, successfully timing exit and reentry points around or during volatile periods repeatedly is impossible. Attempting to do so could leave you poorer and short of your financial objectives. Remember: Short-term volatility is the price for reaping stocks’ long-term gains—a price that is likely worth paying if you need equity-like returns to finance your goals and needs.