Market volatility – we haven’t seen anything yet

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“Despite talk of stock market volatility, the reality is that the FTSE 100 and S&P 500 indices are still behaving pretty calmly relative to the last 20 years, so investors may need to be prepared for wilder times ahead,” says Russ Mould, AJ Bell Investment Director.

Similar quiet periods to match the subdued stock market action of 2015-2017 – such as 1994-1996 and 2004-2006 – were followed by a real spike in volatility which ultimately heralded the market tops of 2000 and 2007.

One lesson investors can therefore draw from history – were it to repeat itself – are that we haven’t seen anything yet in terms of volatility.

Investors can judge volatility by simply looking at how many times the FTSE 100 and America’s S&P 500 indices have moved by more than 1% from open to close on a single day.

The monthly totals of such moves can then be run against how the index did in that time frame. As the charts show, markets do best during periods of calm, can make gains as volatility rises but ultimately capitulate as volatility stokes fear and finally panic.

FTSE 100:

FTSE 100

Source: Thomson Reuters Datastream

S&P 500:

S&P 500

Source: Thomson Reuters Datastream

The UK vs the US

For the moment, the US seems more jittery than the UK. This makes sense given how American stocks trade on much higher valuations than British ones, on average, after a marked period of outperformance, so hopes are higher, valuations are higher and the margin of safety lower, should something (anything) go wrong.

The USA has already racked up 27 daily movements of more than 1% in 2018, compared to just eight in the whole of 2017. Within that, the S&P 500 has already risen or fallen by 2% of more in a day on eight occasions against none in 2017 and a range of just seven to ten times a year during 2012-2016. Thirty-four such movements in 2011 saw the index huff and puff its way to a flat year.

The UK vs the US

Source: Thomson Reuters Datastream. *2018 to close on Monday 9 April

The UK vs the US

Source: Thomson Reuters Datastream

Investors in British stocks are, for the moment at least, more sanguine, despite ongoing concerns over Brexit, the prospect of a more aggressive Bank of England and wider worries over what tariffs may mean for global trade and economic growth.

This may be because a marked period of underperformance relative to other international markets means expectations are lower, valuations are lower and downside protection is thus greater, should something (anything) go wrong.

The FTSE 100 has seen just 14 daily movements of more than 1% this year, although that does leave it firmly on track to exceed 2017’s total of just 17.

FTSE 100

Source: Thomson Reuters Datastream. *2018 to close on Monday 9 April

In addition, the UK’s headline index has moved by 2% or more in a single day on two occasions this year, a figure which already matches 2017’s total.

That, however, is nowhere near the 30-plus instances of such gains or falls witnessed in 1998, 2001, 2002, 2008 and 2011. In all instances except the first one, investors in the FTSE 100 lost money in those calendar years.

FTSE 100 moves

Source: Thomson Reuters Datastream

Lessons for investors

Rising volatility does not rule out further gains in individual stocks or headline indices. The markets rose sharply during 1998-2000 and 2006-2007 after all.

But equally investors must remember that those late-cycle gains were ultimately lost in the bear markets of 2000-2003 and 2007-2009.

Any further increase in volatility – should it transpire – may therefore be a gentle prompt to focus upon risk as well as reward and ensure that portfolios feature some downside protection and ballast. This could mean trimming positions in stocks with weak balance sheets and focusing on those with strong finances, building up some cash or adding some portfolio diversification by adding currently unpopular asset classes such as precious metals or short-duration bond holdings.

Volatility is not the enemy of the investor, as it can provide a chance to sell assets expensively and buy them cheaply (which explains why building up some cash can make sense). But it can be their enemy if the investor either loses their nerve or is forced by circumstances to sell at an inopportune time, when prices are falling, markets depressed and valuations more (not less) attractive.”

These articles are for information purposes only and are not a personal recommendation or advice.


russmould's picture
Written by:
Russ Mould

Russ Mould has 28 years' experience of the capital markets. He started at Scottish Equitable in 1991 as a fund manager and in 1993 he joined SG Warburg, now part of UBS investment bank, where he worked as equity analyst covering the technology sector for 12 years. Russ joined Shares in November 2005 as technology correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media by AJ Bell Group, he was appointed AJ Bell’s Investment Director in summer 2013.