The Second Return of Volatility
Another October, another roller coaster ride in the market. And so it went—a daily torrent of CNBC pundits tripping over themselves to explain the unexplainable. Was it interest rates going up? Well, it might have been on October 10th when the fun really started with the S&P 500 Index down 3.3%, but it most definitely could not have been on October 24th when the S&P 500 was down 3.1% while the yield on the ten-year Treasury Note was down 4 basis points. Of course, at that point the excuse was the usual “flight-to-safety”.
As an easily understandable measure of the volatility of October, we calculated the average magnitude of the daily percentage price change in the S&P 500 Index (1.04%) and found it to be almost triple what it was during the third quarter (0.38%). As crazy as October was, it still lagged February at 1.28%. The market itself provides us with a measure of future expected volatility in the VIX (an index calculated from option prices on the S&P 500). For the month of October, it increased by 75% to a level comparable to where it ended in February.
Although the S&P 500 was down about 6.9% for October, it remains up about 3.0% year-to-date. The technology sector was particularly hard hit, down about 8.5% for the month based on VITAX. Other than bonds and cash, there really was nowhere to hide, as all the segments of the US market, the international developed markets, and emerging markets took a beating.
While it may have been a scary October, let’s hope November give us something to be thankful for.