The stock market has recently and frequently been in the news because of its large daily swings. This raises several questions: Are the swings really new? If so, why are they happening? What do these swings mean?
To answer these questions, I downloaded to an Excel spreadsheet the daily closing values of the Standard and Poor's 500 index since the beginning of 1950. (The S&P 500 is an unmanaged marker of the values of the 500 largest publically-traded U.S. companies.) From changes to the values I was able to calculate the daily swings. Every swing of more than 1% in the S&P 500 I identified as a large one. Here is what I found:
Daily swings are not new. Every decade has had 2-6 years of large daily market swings and also years of relative calm. This year is one of those with many large swings. The most recent calm year was 2006.
The size of the daily swings has gotten larger. Every decade since the 1950's has had at least 2-5 days over the decade of very large daily swings - more than 4%. The 1980's had 13 days of very large swings over the decade. The 2000's had 51 over the decade, 28 of which occurred in 2008. The first 9 months of 2011 have had 6 days with those very large swings.
Years with many large daily swings are not necessarily bad news. In fact, of the 23 years (over the last 61 years) with high volatility since 1950, 56% of them (13 years) resulted in overall increases in the market through the year.
Years with large annual changes are not necessarily the result of many large daily swings. So what effect do daily swings have on the net overall performance for the whole year? Annual returns varied substantially from year to year. The largest annual change in the market since 1950 was an increase of 40.5% in 1954, which was not a year of large daily market swings. The year 2008 was a close second with a decrease of 40.1%. (That year had the largest swings.) Other years with changes of 30% or more in the S&P 500 were 1958, 1975, 1995, 1998, 2003, and 2009. Four of these six years had large swings; two did not. All six of these changes were increases in value!
I believe that the stock market has more swings when there is more uncertainty about the intermediate- and long-term future of companies and the economy. The daily swings may have become larger for two reasons: first, there is more information available for investors to act on, and second, any changes can be acted on much more quickly. These changes in technology have amplified the normal market changes.
We do not know in what ways history will repeat itself. It is likely, however, that some years will continue to have large daily swings and some will not. Some years will have large annual gains and some will not. Unfortunately, no one can predict with any accuracy which will be which.
As proprietor of Plan for Life, Mark Fischer is required to post the following notice: Securities offered through Multi-Financial Securities Corporation, member FINRA, SIPC. Plan for Life, LLC is not affiliated with Multi-Financial Securities Corporation. Investors cannot directly invest in indices. Past performance is not a guarantee of future results. This information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.