Market Brief
MB Financial Bank Asset Management & Trust Group
February 2015
When will the markets get back to normal?
Introduction
Webster’s defines normal as “according with,
constituting, or not deviating from a norm, rule or
principle; conforming to a type, standard to regular
pattern.”1 What today’s equity investors might consider
“normal” may be quite different, especially since the
experience of stock investors of late has been one of
incrementally higher volatility compared to the bull
market run that occurred for most of 2014.
There are a few adages about equity returns for the
year being presaged by the performance of the first few
days, weeks or month of trading. While we pay more
attention to company fundamentals and the economic
landscape, we realize that some investors might have a
case of the jitters from watching the trading activity
this January.
at monthly intervals since 1993. For perspective, the
average level of the VIX is shown as a horizontal line..
A few observations are that volatility goes through
distinct periods where it spikes higher and drifts lower.
When the VIX is drifting lower, stocks have moved
higher with nary a pullback. When the VIX has risen
over a short period of time, stocks have declined. Over
time, the VIX has averaged 20, and the latest monthly
reading at the end of January 2015 was 21.
70
60
VIX - monthly since inception
50
40
30
20
10
This Market Brief helps readers better understand the
day-to-day changes in stock prices, also known as
volatility. We have resisted the temptation to dust off
our old statistics textbook and instead sheds light on
the matter without using words and phrases like:
normal distribution, standard deviation, mean
reversion, skewness and kurtosis. I am sure that
many, many readers must be disappointed, but please
humor me and keep reading.
Measuring volatility without statistics
If we’re not using statistics to measure volatility, how
than can we proceed?
I have two ideas.
First, the options trading floor at the CBOE has a
volatility index, and second we’ll just count volatility
on a day-by-day basis.
VIX
The Chicago Board Options Exchange VIX index,
established in 1993, “is a key measure of market
expectations of near-term volatility conveyed by S&P
500 stock index option prices.”2 For our purposes, we
can consider the VIX a measure of stock market
volatility. To the right is a graph of the VIX measured
1 of 3 | Market Brief | February 2015
0
VIX Index
LT Average
Source: Bloomberg, L.P.
Not shown is the S&P500 Index over this same time
period, but astute readers of this publication may
remember the sharp declines in 1998 when Long-Term
Capital Management failed and 2008 when the subprime crisis began. The bear market of the early 2000s
can be seen as the VIX measures between 20 and 40
over those years. Lastly, the downgrade of the U.S.
credit rating in the summer of 2011 can be seen with
the VIX spiking up to 40.
20 years of volatility data may be perspective that is
just too long for today’s instant gratification world.
Presented next is a graph of the VIX over the past 300
weeks, roughly 5 years This chart in effect “zooms in”
on the rightmost part of the complete chart.
Market Brief
MB Financial Bank Asset Management & Trust Group
The right side of this chart is mostly below the longterm average, indicating that volatility has been lower
than average for the most recent two of the last five
years. Only for the last few months of 2014 could one
argue that volatility had gotten back to “normal” if
Webster’s permits use of the word this way.
50
45
40
35
30
25
20
15
10
5
0
VIX - most recent 300 weeks
February 2015
The table below shows the frequency of daily changes
of more than 100, 200 or 300 points in the DJIA
grouped by decades.
From this graph, one can
conclude that the markets have become more volatile
over time since the number of big moves has risen in
each decade. However, let’s not forget that the index
value of the DJIA has risen from 800 in 1970 to an alltime high over 18,000 last December. A 100, 200 or
300 point move happens more often in the 2000s
compared to the 1970s because those few hundred
points represent a smaller move in percentage points.
900
800
Large moves in the DJIA by decade
700
600
500
400
VIX Index
LT Average
Source: Bloomberg, L.P.
300
200
100
0
Considering the spikes in the VIX to the 40s in
September 2011 and May 2010, a casual observer
probably would not conclude that the VIX’s current
read of 21 is high. The increase in the VIX over the
past few months points to an increase in volatility to
one that is close to the long-run average. We’ll grant
that investors and news media personalities are
entitled to their valid opinion that volatility has
increased. Yes, it has, but the data says the markets
aren’t abnormally volatile.
Counting
If relying on the CBOE constructed VIX to measure
stock market volatility may seem a bit esoteric,
perhaps counting the number of market trading days
with large changes is more helpful. So far this year,
there have been 14 days when the Dow Jones
Industrial Average (DJIA) closed by more than 100
points different from the previous day.
Of the
fourteen, six were over 200 points, and two were over
300. Certainly these moves seem substantial, but over
time as the index value of the DJIA has risen, the
relevance of a 100 point move has declined. And to
make a stronger argument, looking at more data
helps.
2 of 3 | Market Brief | February 2015
1970s
1980s
>100 points
1990s
>200 points
2000s
2010s
>300 points
Source: Bloomberg, L.P.
As a final point, if you allow your eye to compare the
relative size of the 2010s and 2000s bars, you’ll notice
they are about half as large. We are about half way
through the decade of the 2010s and there have been
about half as many 100, 200 and 300 point moves
compared to the 2000s. Volatility has been about the
same in the 2010s as the 2000s.
Percentages
As the value of the DJIA rose nearly 20 fold over the
last 45 years, it takes more and more point changes to
have the same percentage move. To consider percent
moves on a daily basis, we’re switching to the more
diversified S&P500, which we consider a superior
benchmark for the U.S. stock market than the DJIA.
Market Brief
MB Financial Bank Asset Management & Trust Group
A graph of the frequency of daily changes in the S&P
500 by a range of percentages shown below yields
some interesting observations.
According to the
graph, for the entire period, about 50% of the time the
S&P 500 has a daily change by more than 0.5%. Daily
changes in excess of 1% and 2% occur about 25% and
5% of the time while big moves measured over 3%
happen about 2% of the time.
February 2015
The current decade, measured by the orange bar,
appears to be normal. It is about as tall as the others.
Frequency of % moves by decade
70%
1970-2015
1970s
1980s
1990s
2000s
2010s
60%
50%
40%
In terms of comparing volatility on a decade-bydecade basis, it does appear that the 1990s were less
volatile than average since the purple bar
representing that decade is shortest for each group. It
may be easier to see that the 2000s are the most
volatile as the light blue bar is tallest in each group.
30%
20%
10%
0%
> 0.5%
> 1%
> 2%
> 3%
Source: Bloomberg, L.P.
Conclusions and Investment Implications
See, we did it! We completed an entire publication on stock market volatility without using terms from statistics.
Based on the data compiled here, there are several important conclusions. First, the number of points that the
DJIA needs to move to be meaningful has risen over the years. 100, 200 and 300 point moves are much more common today. And these big point moves in the DJIA are happening about as much this decade as the last. Second,
percentage moves are more reflective of volatility than changes in an index’s value. Examining a variety of percentage moves in the S&P500, it appears that the 2000s were a more volatile decade, the 1990s were tame and the
last five years may be considered normal.
As a closing thought, all investors ought to be reminded that volatility, like the infamous bumper sticker in the
1980s, “happens.” Having a suitable mix of higher risk and lower risk assets is key to long-term investment success. MB’s wealth management advisors are skilled in helping investors determine what proportion of their capital ought to be invested in equities, bonds and alternatives and review these with our clients on a regular basis.
1 www.merriam-webster.com/dictionary/normal accessed February 2, 2015
2 http://www.cboe.com/micro/VIX/vixintro.aspx accessed February 2, 2015
Spencer L. Klein, CFA
Senior Portfolio Manager
[email protected]
Investment
Philosophy
MB’s investment philosophy focuses on providing a high-quality investment experience. Using disciplined, fundamentals-based thinking, we
build customized dynamic portfolios to help individuals and institutions meet their goals.
MB Financial Bank Asset Management & Trust 847.653.2149
The opinions, estimates and projections contained herein are those of the author and do not reflect the official views of MB Financial Bank, N.A., including its
parent, subsidiaries, divisions and/or affiliates, as of the date hereof and are subject to change without notice. MB endeavors to ensure that the contents herein have
been compiled or derived from sources that we believe are reliable and contain information and opinions which are accurate and complete. However, MB makes no
representation or warranty, express or implied in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no
liability whatsoever for any loss (whether direct or consequential) arising from any use of or reliance on this report or its contents. Information may be available to
MB which is not reflected herein. This report is not to be construed as an offer or solicitation to buy or sell any security by MB Financial Bank, N.A. This report is
not intended to be investment advice. The products offered are not insured by FDIC or any other government agency, are subject to market risk, not a bank deposit,
carry no bank guarantee, and may lose value. Past performance is no guarantee of future results. Stated stock performance may not be representative of actual
client returns due to transaction costs and the timing of trades. Unless otherwise specified, all data is as of market close, December 31, 2014 and all returns and
chart data calculated from Bloomberg L.P. To unsubscribe to this newsletter, reply to this email with “unsubscribe” in the subject line.
3 of 3 | Market Brief | February 2015