Higher Volatility, Lower Returns

Ugh!  I hate being sick.  I took much of work off today because I feel awful and have been fading in and out.  I'm "in" at the moment so I thought I'd post a piece on volatility I researched the other day.

Since 1980, market volatility - defined as the annualized standard deviation of the S&P 500 over the previous 60 calendar days - has averaged 14.7%.  During the past three years, volatility rarely hit that level.  From the beginning of 2004 through the end of June (1277 days), volatility averaged 10.4%. 

There have been two other extended periods of low volatility since 1980 – roughly from June 1, 1983 to June 30, 1986 (1126 days); and June 1, 1991 to March 31, 1997 (2131 days).  In 1983-1986, volatility averaged 11.9%.  In 1991-1997, volatility was 10.0%.  Thus, our current time period is not unique. 

In the three periods of higher volatility, volatility averaged 15.8% from March 1 1980 to May 31, 1983 (1188 days); 17.2% from July 1, 1986 to May 31, 1991 (1796 days); and 20.1% from April 1, 1997 to Dec 31, 2003 (2466 days). 

Volatility averaged 10.6% during periods of low volatility and 18.2% during periods of high volatility.  There have been just under 10,000 trading days since January 1, 1980, and market volatility was above the 14.7% average 55% of the time.

Generally, lower volatility means higher returns.  Annualized price returns (excluding dividends) for the aforementioned periods of low and high volatility environments were

Low Volatility
1983-1986    15.1%
1991-1997    12.0%
2004-2007    9.0%
Total low volatility  12.0%

High Volatility
1980-1983    11.9%
1986-1991    9.4%
1997-2003    5.9%
Total high volatility  8.3%

Thus, if we are in a period of higher structural volatility, as I believe we are, market returns should be lower.

Comments

[Peter]

Toro,

Hope you're feeling better. I was hoping to read another one of your posts.

[psychodave]

"Hope you're feeling better. I was hoping to read another one of your posts." [Peter]

What he said.

Especially a post with the italicized Editor's comments. They've always been fun.

[Toro]

Gawsh...