Investors who feel like there have not been many good days to cheer so far this year are correct to think that way. As shown in the LPL Research Chart of the Day, the year-to-date percentage of days that the S&P 500 has seen a positive daily return is just 43.5%. This is the lowest value since 1974 when the market ended the year down almost 30%. Years with such low percentages of up days unsurprisingly normally do end underwater, with only 1982 managing a positive return after so few up days. The good news from this data is that the year following on from one with such few up days tends to see well above average returns, with an average and median return of 12% and 17% respectively. Caution though must be paid to the small sample size and the very wide range of returns from +44.1% to -29.7%.
Market volatility in major stock markets, including the S&P 500, has continued to be elevated this year as markets gyrate up and, mainly, down, with wild swings occurring in both directions. Rising recession risks, stubbornly high inflation and elevated geopolitical risk and uncertainty are all adding to the volatility on the bearish side, with oversold conditions, extremely pessimistic market positioning, and somewhat resilient earnings still providing some fodder for more bullish market participants
The most common measure of market volatility, the Volatility Index (VIX) has been elevated, and above 30 for much of the past few weeks, but has not reached the 40+ levels that we have normally seen in prior market dislocations. Some other measures of volatility however are showing levels that are consistent with prior market dislocations.
So far this year we have seen an elevated number of instances of daily returns (positive or negative) greater than 2%. There have been 39 occurrences year to date, with 7 of these occurring in the last 14 trading days. Thursday, Friday of last week and Monday of this week all saw daily moves greater than 2% in magnitude. This was the first time this had occurred on three consecutive days since July, and only the 7th time since the Great Financial Crisis (GFC). Interestingly, despite the market being down sharply this year, the number of big up days has been approximately equal to the number of big down days, which is consistent with long run averages, even in bear markets.
Markets have also seen elevated intraday volatility, with Thursday of last week marking a huge intraday reversal. A large gain at the close, of over 2.6%, obscuring an intraday range of over 5.5%, as stocks initially reacted negatively to the hotter-than-expected CPI report before bouncing back strongly later in the session. The last time there was such a large intraday swing was right around the 2020 market low, and it would be unusual to see a bear market low without at least a few more of these occurring.
Much of this market data, along with sentiment data from the American Association of Individual Investors and the Bank of America fund manager survey, appears to suggest that many market participants are approaching levels of pessimism similar to major market events such as the GFC, Dot Com Bubble, or even Great Depression. At present we do not believe this level of pessimism is warranted, and while we believe that the risk of a mild recession has probably risen to more likely than not, the S&P 500 still has the potential to see gains from here to year-end, even if it’s against a continued backdrop of above average volatility.
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