Understanding the Long-Term Average Monthly Volatility of the SP 500
The SP 500, one of the most widely followed equity indices in the world, experiences varying levels of volatility over different time frames. When considering the long-term average, a common estimate for monthly volatility is between 4 to 6%. This translates to an annualized volatility of approximately 15 to 20%, calculated by multiplying by the square root of 12 to account for the number of months in a year.
However, volatility can fluctuate significantly due to economic conditions, market events, or shifts in investor sentiment. These factors highlight the importance of analyzing historical data to obtain precise and up-to-date measurements of volatility. Recent figures indicate that at today’s levels, the SP 500 Index might be around 30 points, while the equivalent for the Dow Jones Industrial Average could be over 250 points.
Daily Volatility Variability
The Average Daily Range is another important measure of volatility, reflecting the day-to-day price movements of the SP 500 Index. Figure 3 demonstrates the variability of this measure over the years. The range experienced a rise across most of 2015, before settling back a bit. This trend continued through the next couple of years, and currently, this measure of volatility is near historic lows. This historical fluctuation demonstrates that volatility can move from ultra-low to ultra-high levels and back again, underlining its unpredictable nature.
Historical Volatility Trends
Recent decades have seen notable periods of both high and low volatility. The past decade, in particular, stands out with its unique, but not unprecedented, volatility patterns. High or rising volatility typically corresponds with declining markets, while low or falling volatility is associated with good markets, as Figure 4 illustrates.
Historically, lower volatility periods are not unusual and can last for quarters or even years. Investors who became accustomed to the extremely low volatility of the mid-2000s might have been taken aback by the subsequent surge in volatility. Yet, as is true in every cycle, market volatility returns to a certain level. An understanding of these historical cycles can provide a more rational perspective for investors, allowing them to take actionable steps to protect their portfolios during periods of high volatility while being positioned to benefit from improved market conditions as volatility abates.
Ultimately, volatile markets present both risks and opportunities. Assessing portfolios during favorable market conditions can help ensure their resilience in the face of future storms, as periods of low volatility are more reflective of current market trends rather than predictors of future performance. By understanding the historical context of volatility, investors can make informed decisions and remain more prepared for the ever-changing landscape of the financial markets.