2020: What Just Happened? Pt. 2

The Volatility Roller Coaster

Part 2 of the series: 2020: What Just Happened? A Stock Market Untethered

Just a reminder: Volatility is a measure of how much an asset’s price swings against an average.

Unsplash: @etiennegirardet

Update: As of February 24th, 2021, on a day in which the S&P 500 dropped more than -2.4%, the S&P 500 has only experienced two days, both negative, of high volatility (>+/- 2%) in 2021.

At this current pace, we’re set for 10 to 11 more days of high volatility in 2021. But if history rhymes and we’re mid-verse, we could be in store for far many more volatile days in 2021 as the global economy gets back on track.

The US Stock Market during the Covid-19 Pandemic

2020 has been a uniquely abnormal year in terms of the stock market. Plunging -31.6% from the beginning of 2020 to an annual low on March 23rd, the Wilshire 5000 Total Market Index, a grouping of securities that measures all publicly listed US companies, has made a remarkable comeback.

In a “normal” year, economic recessions tend to cause muted returns in the stock market. Yet even in the face of such economic disruption, the market has posted astonishing gains.

2020 Stock Market Returns
Source: Wilshire Associates

By the end of December 2020, the Wilshire 5000 is up nearly 20% on the year. This represents an intra-year swing of 75% between the depths of March to the exuberance of December or approximately an increase of $17.7 trillion of value. Sheesh! For context, on average the Wilshire 5000 has returned 13% per year since its inception in 2013.

However, the road back to positive returns has been remarkably bumpy and unpredictable. In 2020 the VIX Index (CBOE S&P 500 Volatility index) averaged 117.4% versus an average of 5.13% between 1990 and 2019.


2020 has also been chock full of superlatives and hyperbole on the subject of volatility. As Henry Kravis, founder of private equity giant KKR, declared on 10/30 to Bloomberg:

“I’ve been investing for over 50 years; I don’t remember a time [2020] when I’ve seen such volatility as we see today.”

We disagree, though we understand the sentiment. Until this year, there has never been so short of a turnaround from a bear market (commonly defined as a drop of 20% of a major index) to a recovery to the previous high. In 2020, the Stock Market took just 6 months (February 17th to August 18th) to recover, and even posted an annual return of double digits to boot. Stranger still is the way in which the markets fell into and rallied out of bear market. Let’s take a look at this volatile year below.

March Madness

A sudden rise in COVID-19 cases in New York City, and the announcement of nationwide shutdowns sent markets into a tizzy, with a majority of trading days exhibiting “high volatility” (which we define as a move in and the S&P 500’s Open and Close price by +/-2% or more).

In March 2020, across 22 trading days, there were a total of 18 trading days where the S&P 500, the most popular index, had high volatility. This means there was more than a 75% likelihood that the stock market would move +/-2% or more on a given trading day.

2020 Stock Market Volatility
Source: Author’s Analysis

This concentrated level of volatility is unprecedented. The closest level of protracted volatility was in November 2008 during the height of the global financial crisis. Across the 19 trading days in October 2018, there were 14 days that the S&P 500 moved +/- 2%, or a high volatility day likelihood of 73%.

By looking at March using this specific measure, Mr. Kravis is correct. But taking a step back, and looking at the stock market from 1980-now, 2020 as a whole is very rare but not unique in terms of days of high volatility.

High Volatility Days For the Year

Historical Stock Market Volatility
Source: Author’s analysis, with S&P 500 data from YCharts

Looking at 2020 in total, for the S&P 500 there was a total of 44 trading days in which the market closed more than +/- 2% from the previous day in 2020. Using this methodology of volatility analysis, which was first presented intra-year by NASDAQ Dorsey Wright, 2020 has been the 4th most volatile year in the past 40 years.

In the past 40 years, 2002, 2008 and 2009 all saw more days of higher volatility than 2020. In 2008 alone, there were 72 days of high volatility, 8 times the median of 9 days that move +/-2% or more in a given year. While not quite as volatile as 2008, 2020 was still extremely volatile.

What’s important to note is that this type of volatility is generally bad for returns. In years where high volatility days made up more than 10% of total trading days (e.g., 2020: 20.38%), the S&P 500 has averaged an annual return of -5.22%.

Source: Author’s Analysis, with S&P 500 data from YCharts

Of this selection of years, only 2009 and 2020 outperformed the S&P 500’s annual average return of 10.2% between 1980 and 2020. Despite 2020’s volatility, the S&P 500 has performed remarkably well with a 17.74% return, and a median daily return of 0.32%. However, high volatility years tend to clump alongside one another.

High Volatility Years

S&P Volatility

As illustrated in the chart above, years in which the S&P 500 had ten or more +/-2% trading days have tended to cluster. This pattern can be largely attributed to protracted market reactions to bubbles and recessions.

This makes sense from an economics perspective, as a shock to the market like a recession can create prolonged periods of volatility as investors try to weigh if the economy is improving or stuttering.

And while the US Economy is starting to recover in 2021, the timeframe of when we will return to normalcy, along with the long-term economic impacts of the global pandemic and any road bumps we may encounter in recovery remain to be seen. If history repeats itself, 2021 probably holds more volatility in store for the markets.



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Discover with TAI, your investing copilot. Alex Kwan ex-Head of Strategy & Finance @ Relativity Space. Anh-Tuan Bui ex-Investment VP @ First Pacific Advisors.