According to Vanguard, recent stock-market movement is just plain vanilla. In a report released Wednesday, the authors argue that when compared to previous periods of significant events, the volatility of August 2011 should be seen as fairly normal and “not unexpected.”
“Although the stock-market volatility … appears extraordinary relative to the calm of the last year, [data] demonstrates that the levels of market variations today are, in fact, “ordinary” relative to the volatility of other periods characterized by major global macro events,” state authors Francis M. Kinniry Jr., CFA, Todd Schlanger and Christopher B. Philips, CFA.
From July 1992 to August 2011, the S&P 500 Index moved an average of 0.7% per day, explains the report (titled “August 2011 Stock Market Volatility: Extraordinary or ‘Ordinary’?”). It spiked, or doubled, to 1.46% when significant global events occurred.
“As a result, we would argue that August’s volatility in equities, although high and painful to many investors, was not unexpected, given the market environment and the widespread repricing of risk. Thus, in Vanguard’s view, to cast the current environment as a ‘new paradigm’ of volatility is misleading,” the authors add.
In August, a resurgence of the Euro zone debt crisis, the prospect of a slowing global economy, political brinksmanship in Washington, D.C., and Standard & Poor’s formal downgrade of U.S. Treasury bonds from their Triple-A status created a great deal of “uncertainty in a market already struggling to reprice risk,” the Vanguard report notes.
From Aug. 5 through Aug. 30, the S&P 500 Index moved an average of 2.5% per day. This represented a “substantial increase” over the periods immediately prior to the downgrade, the authors explain.
In terms of the number of days the S&P moved 4%, for instance, 2008 saw such volatility for 23 days. This level of movement occurred for seven days in 2009, no days in 2010, and six days so far in 2011. Movement of 1% took place 129 days in 2008, 108 days in 2009, 67 days in 2010, and 46 days in 2011 to date.
Who’s to Blame?
Vanguard’s experts are firm in their belief that putting the cause of August’s volatility on the shoulders’ of market participants (and the media) is misguided and “potentially dangerous.”
If that were the case, investors also would have expected to see “a systematic upward shift in the volatility level over time. Instead, … volatility remained stable and low over the preceding months and instead spiked in conjunction with the emergence of significant global macro dislocations, capped by the downgrade of U.S. Treasury debt,” the report says.
Despite the downgrade, Treasury bonds rallied and returned 2.78% for the month of August, Vanguard explains, “as investors’ perception of future uncertainty and market risk increased, and a flight to quality ensued.”
While surprising to some, such results have been common historically during periods characterized by significant global macro events, the authors note.
In the report, Vanguard’s experts looked at the movement of two hypothetical balanced stock/bond portfolios, an 80% S&P 500 Index/20% Barclays Capital U.S. Aggregate Bond Index and a 40% S&P 500 Index/60% Barclays Capital U.S. Aggregate Bond Index. They point out that in 2008 and 2011, the S&P 500 experienced “markedly more volatility than the two more conservative portfolios.”
Thus, they conclude: “For those investors employing sound diversification strategies, the benefits of mitigating realized volatility have been clear … Whether one considers the recent period of market volatility extraordinary or simply ordinary—that is, compared to events of similar perceived gravity—the bottom line is that investors with balanced, diversified portfolios have faced much less aggregate volatility than the headlines would suggest.