US stocks have gotten off to a strong start this year, but the sloppiness that characterized last year’s tumult has yet to abate, which could portend more volatility ahead.
Last year, the S&P 500 SPX,
registered 122 daily swing of 1% in either direction, according to data shared by DataTrek’s Jessica Rabe. That’s the most since 2008, and 12 more than in 2020, when the emergence of the COVID-19 pandemic sent markets into a tailspin, but also a bumpy recovery.
Last year’s swings were way above average. Since 1958, the S&P 500 has typically seen 55 1% swings per year. By this measure, the index’s performance was a major outlier, falling two standard deviations above the mean.
The S&P 500 was launched more than six decades ago in 1957, but in all that time, there have only been eight years when the index recorded more than 100 daily swings of 1% or more. They were: 1974 (115), 2000 (103), 2001 (107), 2002 (126), 2008 (134), 2009 (118), 2020 (110) and 2022 (122).
What does this tell us about potential performance for the stock market in 2023?
An analysis by DataTrek found that increased realized volatility typically bleeds into the first quarter of the following year. Often, the number of extreme swings remains significantly higher than the historical quarterly average for the index, which stands at 13 per quarter.
So far, the market’s performance for the first quarter is shaping up to be about as volatile as the historical data suggests. According to an analysis by Bespoke Investment Group, the S&P 500 is on track to log eight moves of 1% in either direction in January, barring another outsize swing on Tuesday, the last trading session of the month.
That is related to last January’s number. However, there is an important difference: only three of this month’s 1%+ moves were to the downside, roughly half of last January’s number, as Bespoke shows in the chart below.
Should the large-cap index post another 1%+ move on Tuesday, it would mark the most 1% swings to begin a year since January 2016, when the S&P 500 logged 13 such moves during a rocky period for global stocks .
According to DataTrek’s analysis, investors should expect this shock to continue for the rest of the first quarter.
“… the Q1 after a particularly volatile year is typically bumpy and returns are therefore a coin penalty, whereas volatility tends to ease over the course of the year and annual returns are more favorable as a result,” Rabe said.
The S&P 500 rose 0.8% in recent trading, putting it within reach of another 1% swing by early afternoon in New York. The Nasdaq Composite COMP,
was up 1%, while the Dow Jones Industrial Average DJIA,
increased by 0.5%. All three indexes are on track to log a quarterly advance, with the Nasdaq leading the way with a gain of about 10% year-to-date, while the S&P 500 is up nearly 5.5%.