Volatile Market - Situation Normal

By Mark F. Toledo, CFA

*Updated 3:36 pm* A minor correction has been updated reflecting the annual return range. 

May 23, 2019

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Volatile Market - Situation Normal

The volatility of equity prices and returns during the 21st century have raised questions about the nature of the financial markets. A common one is has the geo-political environment and rapid development of new technologies made the equity market more volatile. To answer this question, we first need to determine if the market has been more volatile during the past 20 years relative to the long-term.

The following table presents the annualized returns and standard deviation of returns for the S&P 500 index over several different time frames. The longest 93 year time frame shows the often cited long-term annualized return of near 10% with a standard deviation of 18.6%. These statistics generally mean that about two-thirds of the time the annual return has fallen in a range of -10% to +30%, which implies that in about one out of three years the return has been outside of this range.

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The above table shows that over the past 50-year and 30-year periods, the long-term return has been consistent near 10%, but the measure of volatility has fallen to near 15%. Perhaps, the lengthening of the expansionary stage of the economic cycle has dampened volatility in the equity market. The current expansion is approaching 10 years, which would match the duration of the 1990’s expansion. In contrast, expansions during the 1926 to 1969 time frame averaged near 4 years.[1] The US and global economies have changed, but the volatility of the equity market has not increased.

In the 21st century, equity returns have been below normal, but volatility has not increased. This time frame includes the 2000-03 and 2008 equity bear markets. These bear markets contributed to the annualized return of near 6% over the past 20 years, well below the 10% long-term average. Meanwhile, the standard deviation of 14.5% during the last two decades is near the 50-year average.

The most recent 10-year period, which approximates the current economic expansion, has produced above average returns with below average volatility. We should expect that the equity market and economy will eventually experience a painful setback. The key question is when.

Howard Marks, a successful portfolio manager, recently published a book with the enticing title- Mastering the Market Cycle: Getting the Odds on Your Side. Shortly into the book, the reader encounters the following statement by the author:


I’m firmly convinced that markets will continue to rise and fall, and I think I know (a) why and (b) what makes these movements more or less imminent. But I’m sure I’ll never know when they’re going to turn up or down, how far they’ll go after they do, how fast they’ll move, when they’ll turn back toward the midpoint, or how far they’ll continue on the opposite side. So there’s a great deal to admit uncertainty about.[2]


Uncertainty about the future represents the essence of risk as noted in the following quote from Peter Bernstein, a highly regarded investment analyst and author:


Essentially risk says we don’t know what’s going to happen. . . . We walk every moment into the unknown. There’s a range of outcomes, and we don’t know where [the actual outcome is] going to fall within the range. Often we don’t know what the range is.[3]


Even when we accept uncertainty, we can still have reasonable expectations about the future. Over the next decade, the economy should grow, corporate profits are likely to expand and stock prices should rise. Additionally, the volatility of equity returns is likely to be higher than the variations in the growth rates for corporate profits and the economy. As compensation for uncertainty, equity investors expect to earn a higher return than holders of bonds and cash reserves.

Mark F. Toledo, CFA is a Partner at Chicago Partners Wealth Advisors. He has been a wealth manager for over 35 years and has helped hundreds of individuals and foundations create better wealth management solutions.


[1] National Bureau of Economic Research Business Cycles, https://www.nber.org/cycles.html, accessed 05.22.19

[2] Marks, Howard. Mastering the Market Cycle: Getting the Odds on Your Side. HMH Books. Kindle Edition Location 593 of 4413.

[3] Bernstein, Peter. Economics and Portfolio Strategy newsletter titled “Can We Measure Risk with a Number?” June 2007.

Important Disclosure Information

Past Performance isn’t indicative of future performance. An index is unmanaged, and you cannot invest directly in an index. This communication may include forward-looking statements that are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. The S&P 500 index is a widely used barometer of U.S. stock market performance. As a market-weighted index of leading companies in leading industries, it is dominated by large-capitalization companies.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP.  Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  CP

*Updated 3:36 pm* A minor correction has been updated reflecting the annual return range. 

May 23, 2019

Download PDF

Volatile Market - Situation Normal

The volatility of equity prices and returns during the 21st century have raised questions about the nature of the financial markets. A common one is has the geo-political environment and rapid development of new technologies made the equity market more volatile. To answer this question, we first need to determine if the market has been more volatile during the past 20 years relative to the long-term.

The following table presents the annualized returns and standard deviation of returns for the S&P 500 index over several different time frames. The longest 93-year time frame shows the often cited long-term annualized return of near 10% with a standard deviation of 18.6%. These statistics generally mean that about two-thirds of the time the annual return has fallen in a range of -10% to +30%, which implies that in about one out of three years the return has been outside of this range.

Image

The above table shows that over the past 50-year and 30-year periods, the long-term return has been consistent near 10%, but the measure of volatility has fallen to near 15%. Perhaps, the lengthening of the expansionary stage of the economic cycle has dampened volatility in the equity market. The current expansion is approaching 10 years, which would match the duration of the 1990’s expansion. In contrast, expansions during the 1926 to 1969 time frame averaged near 4 years.[1] The US and global economies have changed, but the volatility of the equity market has not increased.

In the 21st century, equity returns have been below normal, but volatility has not increased. This time frame includes the 2000-03 and 2008 equity bear markets. These bear markets contributed to the annualized return of near 6% over the past 20 years, well below the 10% long-term average. Meanwhile, the standard deviation of 14.5% during the last two decades is near the 50-year average.

The most recent 10-year period, which approximates the current economic expansion, has produced above average returns with below average volatility. We should expect that the equity market and economy will eventually experience a painful setback. The key question is when.

Howard Marks, a successful portfolio manager, recently published a book with the enticing title- Mastering the Market Cycle: Getting the Odds on Your Side. Shortly into the book, the reader encounters the following statement by the author:


I’m firmly convinced that markets will continue to rise and fall, and I think I know (a) why and (b) what makes these movements more or less imminent. But I’m sure I’ll never know when they’re going to turn up or down, how far they’ll go after they do, how fast they’ll move, when they’ll turn back toward the midpoint, or how far they’ll continue on the opposite side. So there’s a great deal to admit uncertainty about.[2]


Uncertainty about the future represents the essence of risk as noted in the following quote from Peter Bernstein, a highly regarded investment analyst and author:


Essentially risk says we don’t know what’s going to happen. . . . We walk every moment into the unknown. There’s a range of outcomes, and we don’t know where [the actual outcome is] going to fall within the range. Often we don’t know what the range is.[3]


Even when we accept uncertainty, we can still have reasonable expectations about the future. Over the next decade, the economy should grow, corporate profits are likely to expand and stock prices should rise. Additionally, the volatility of equity returns is likely to be higher than the variations in the growth rates for corporate profits and the economy. As compensation for uncertainty, equity investors expect to earn a higher return than holders of bonds and cash reserves.

Mark F. Toledo, CFA is a Partner at Chicago Partners Wealth Advisors. He has been a wealth manager for over 35 years and has helped hundreds of individuals and foundations create better wealth management solutions.


[1] National Bureau of Economic Research Business Cycles, https://www.nber.org/cycles.html, accessed 05.22.19

[2] Marks, Howard. Mastering the Market Cycle: Getting the Odds on Your Side. HMH Books. Kindle Edition Location 593 of 4413.

[3] Bernstein, Peter. Economics and Portfolio Strategy newsletter titled “Can We Measure Risk with a Number?” June 2007.

Important Disclosure Information

Past Performance isn’t indicative of future performance. An index is unmanaged, and you cannot invest directly in an index. This communication may include forward-looking statements that are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. The S&P 500 index is a widely used barometer of U.S. stock market performance. As a market-weighted index of leading companies in leading industries, it is dominated by large-capitalization companies.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP.  Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  CP