December Volatility

SeanCommentary, Insights, Recent Highlights

The past few weeks, indeed the last three months, have been ugly ones for stocks around the globe, including here in the U.S. Stocks reached their recent high on September 18th, and it's been downhill since. The fourth quarter, were it to have ended last Friday, would be third worst since 1915 as measured by point decline, but only the 14th worst quarter in percentage terms. While the swiftness of the drop has been startling to many, the magnitude of the intra-year drop and the year-to-date return are not unusual by any measure. Take a look at the chart below, updated through last Thursday.


The orange dots show the largest intra-year decline for each calendar year back to 1980, while the blue bars show the total returns for those same years. Take 2010, for example: the S&P 500 saw a -16% intra-year drop and yet the overall return for that year was +13%. The average intra-year decline for all years (meaning the average temporary downward fluctuation from high point to low point that we've seen across all years since 1980) has been about 14%. From this year's high point in September through the end of last week, we have seen a 17% dip, so not that far off of the "average" intra-year drop, and the total return YTD is -10%, which is also not uncommon as bad years go. I will say it's been a while since we've seen a down year of any significance (2008 to be exact), so investors as a class may have forgotten what a year like this feels like. Note that not all years that are ugly are followed by bad years and, in fact, most bad years are followed by better years, with 2000-2002's unusually bad three-year stretch being a very ugly exception.

So, looking backwards in time, is there anything we can glean from the historical returns of quarters this bad or worse? The table below shows all quarters with S&P 500 returns worse than this quarter, assuming the quarter were to end today. As you can see in the second column, the average return of those even-worse quarters was a painful -23.1%. And yet, looking across the subsequent one-, three-, and five-year periods that followed these very bad quarters, we can also see that the cumulative returns looking forward were +25.6%, +37.9%, and +91.3%, respectively.


Of course, past averages don't tell us what will happen this time, but the historical record does provide some encouragement for looking beyond the painful quarter we've been experiencing. I am sure there are some who will understandably say, "...but this time it feels like the everything is going wrong." Of course, it may feel like that right now, but remember: such was certainly the case in each of the 13 quarters shown in the table above—quarters that were even worse as measured by market performance than what we've seen these last three months—otherwise they wouldn't likely have been as ugly as they were. In two up notes: 1) Emerging market performance, which like most international investment categories, had underperformed the US market for most of the last few years, has significantly outperformed the US this quarter, dropping only 9% vs. the S&P 500's 17%. I know that may seem like cold comfort right now but thought it worth a mention none-the-less; 2) Not that I would recommend wine as a primary investment strategy, but the Liv-ex 1000, a broad index of the fine wine market, is up 10% year-to-date, significantly outpacing all broad equity indices this year. And, of course, in a really bad market, such an investment can always be uncorked.

I'll have more to say after the first of the year as part of my quarterly commentary, but thought some perspective between now and then might be helpful. Merry Christmas and Happy New Year! As always, please let us know if there is anything we can do for you.