After a long period of low volatility comes to an end, doomsayers often predict a drop in markets. But our analysis of US and UK market history suggests otherwise.
The recent period of low volatility has come to an end. Calm in global stock markets was shaken by concerns that the Trump administration might not be able to pass the tax changes that many expected.
On 21st March, the S&P 500 index lost 1.2%, ending a run of 109 consecutive trading days during which the market didn’t fall by more than 1%. That run was quite exceptional; indeed, we haven’t seen a period like it since 1995.
In the UK, the period of low volatility has been less impressive, but still noteworthy. On 28th March the UK market — in this case the FTSE 350 — passed 50 days since it lost more than 1%.
The end of a long run of low volatility in equity prices is often met by calls from the doomsayers that the market will now fall off a cliff, as the supposed complacency of investors meets a hard reality.
But does this assessment of history stand up to scrutiny?
Looking back at the daily history of the US market since the Second World War, we‘ve identified 12 periods during which the market was very relatively placid for 100 days or more. In 75% of these cases, the market actually rose over the following year, with an average gain of 7.2% in the S&P 500 over 12 months.
For the the UK, since 1985 there have been 22 periods when the market didn’t experience a significant fall for 50 consecutive days or more. In 77% of these cases, the market rose over the next year. When dividends are included that figure rises to 91% of times, with an average return of 8.9% in the following year.
This analysis is obviously just a simple review of stock market history, but it illustrates an important point. Low volatility in equity markets is typically a feature of markets that are going up, rather than a harbinger of a market set for sharp correction.
Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.
Source: Nutmeg analysis based on data from Macrobond AB.