Market Volatility

No doubt about it, there’s a “Whole lotta shakin’ going on” in the stock market these days. We’ve seen the headlines about big daily advances and declines in the markets and Standard & Poor’s has now confirmed that U.S. stock volatility has climbed to its highest level in 70 years. As reported in a March 20 article from Bloomberg, Standard & Poor’s said the benchmark S&P 500 Stock Index has advanced or declined 1% or more on 28 days in 2008 through mid-March. That came out to 52% of the trading days, which is the highest percentage since 1938. Back in 1938, the comparable number was 57%. Interestingly, despite the volatility in 1938, the S&P 500 actually rose 25% that year.

For a little historical perspective, going back to 2002, the S&P 500 had 1% moves 50% of the time. In 2006, that figure dropped to 12%. It rose slightly to 13% in the first half of 2007, then soared to 39% in the second half of the year.

While the overall market is experiencing volatility, the daily swings in certain individual stocks is also quite astonishing. For example, on March 17, Merrill Lynch had a high price of $42.42, a low of $37.25, and it closed the day at 41.18, according to data from Yahoo! Finance. That’s a drop of 12% from its high to low and a rise of 11% from its low to its close – all in one day! However, that pales in comparison to the trip that Lehman Brother’s stock took that same day. It had a high price of $34.91, a low of $20.25, and it closed at $31.75. That’s a drop of 42% from its high to low and a rise of 57% from its low to its close – again all in one day!

It’s very unlikely that the value of those companies changed by that much in one day. Instead, what we saw on March 17 was an extreme emotional reaction to unfolding events. Fear is a very potent emotion and it was on grand display that day. The significant movements may also suggest that investors (or speculators) still lack strong conviction about the future direction of the market.

As it relates to you, the market action on March 17 will likely just be an interesting footnote, if that. These large daily swings make great headlines and are fodder for the talking heads, but to long-term investors, they are just a blip.

Volatility can be scary and it tends to shake out the “Nervous Nellies”. For investors who have an historical perspective, and who have an understanding of how emotions can play out in the financial markets, volatility may be an ally. After all, if there was no risk to investing, there’d also be no significant return.