Recently my colleague Morgan Housel wrote about how 2013 has been a very light year in terms of volatility. Morgan noted that the Dow Jones Industrial Average (DJINDICES: ^DJI ) is on track to be the least volatile year since 1995, based on the number of days in which the index has moved higher or lower by 1% or more. If things remain the same for the rest of the year, it will be the 13th least volatile year since 1928.
On Aug. 13, Morgan wrote:
Since 1928, the Dow has closed up or down more than 1% an average of 57 days per year. So far this year, there have been 15 closes up or down more than 1%. If that trend holds, we'll finish the year with about 21 1% days. Compare that with 148 1% days in 2009, 79 in 2010, and 54 in 2011.
Since the time Morgan's article was published, the Dow closed down 1.47% on Aug. 15, bringing the total 1% moves for the Dow to 16 in 2013. Morgan's estimate of 21 total days in 2013 of 1% moves may likely hold up, but I think we'll see more than what Morgan is predicting, based on the reasons for which we've experienced volatility thus far in 2013.
A one-way ticket to volatility, please!
At the Dow's current level, it needs to gain or lose slightly more than 150 points to change by 1%. In the past I've talked about the high number of triple-digit moves the Dow experienced during the month of June and a number of other 100-point Dow moves clustered together during the year -- and I concluded that the clusters of moves all correlated to Federal Reserve meeting dates. Nineteen of the 24 days in June that saw triple-digit moves were probably caused by the rapid increase in interest rates as investors began growing concerned about how the Fed's policies may change in the future.
Of the 16 days in 2013 on which the Dow has moved more than 1%, seven of them came within days after a Fed meeting. Six of the 16 came in June, when interest rates were rising, and the most recent was Aug. 15, after rates again jumped higher as investors received positive economic data -- which may mean the economy is strong enough for the Fed to pull the plug on its stimulus program and begin tapering.
The renewed fears of tapering really started on Aug. 6, when we had not one, but two Federal Reserve officials telling the world that they believed the Fed will probably begin tapering its $85 billion bond-buying program sometime this year. Since then, the Dow has fallen seven out of the past nine trading days. Two weeks ago, the Dow dropped 232 points, or 1.48%, and this past week it fell 344 points or 2.23%. The Fed has three more meetings scheduled for the year, with the next coming Sept/ 17-18, meaning that would be the earliest we could see the tapering actually begin and when serious volatility would begin as a result.
But investors should also note that even if the Fed doesn't start tapering at that meeting, the markets will probably move more than 1% at least once in the days following the meeting, as it has all this past year. And what if the central bank does start tapering? Well, it's going to be June all over again, with the overwhelming majority of the trading days experiencing triple-digit moves and a high-single-digit number of days in which the Dow moves more than 1%.
While I think volatility is going to increase for the remainder of 2013, that doesn't mean I'm going to change my trading habits or my investing ideal of buying strong companies and owning for them for a long time. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.