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So Far, It's Not Like the 1930s

By Brad Hessel – Updated Apr 6, 2017 at 2:02PM

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Stock market volatility declines -- again.

Motley Fool guest contributor Brad Hessel manages an investment advising service in North Carolina. He has previously worked in investment banking, and has founded or co-founded a computer game design company, a CASE tool software company, and a knowledge-management consulting practice. 

Volatility in the S&P 500's valuations declined for the fourth consecutive quarter in the final quarter of 2009. The average daily change in the value of the S&P 500 index for the fourth quarter was ±0.75%, down sequentially from ±0.78% in the third quarter, ±1.27% in the second, ±2.00% in first, and a bloodcurdling ±3.27% in Q4 2008 -- the highest level of volatility for a quarter ever.

Even though volatility in each quarter was lower than the one before, 2009 overall was 93% more volatile than "normal" (the all-time average daily change in the value of the S&P 500 index, which is ±0.61%). Average daily volatility for 2009 overall logged in at ±1.19%, which made it the third most volatile year on record -- behind only 2008 (±1.71%) and 2002 (±1.24%).

An explanation
Peaks in volatility are strongly associated with negative return-on-investment. Over the past 50 years, every single volatility peak -- years with unprecedented levels of volatility -- were downers:

  • -12% in 1962 (volatility: ±0.65%)
  • -30% in 1974 (±1.06%)
  • -23% in 2002 (±1.24%)
  • -38% in 2008 (±1.71%)

The last three constitute the three worst annual ROI performances since the inception of the S&P 500 (1957, although we have reconstituted data back to 1950). And the fourth-quarter 2008 volatility peak of ±3.27 -- which is 431% of "normal" volatility -- stands as the all-time champion. There is nothing remotely comparable ... unless you go back to the 1930s.

What we're tracking
Normally, we use the S&P 500, tracked by the SPDRs (NYSE:SPY) exchange-traded fund and including major stakes in components such as Apple (NASDAQ:AAPL) and Goldman Sachs (NYSE:GS), for benchmarking and analysis purposes. SPDRs is used in preference to the Dow Jones Industrial Average, which in ETF form is tracked by the Diamonds Trust (NYSE:DIA) and holds the big 30 blue chips, including components Bank of America (NYSE:BAC), ExxonMobil (NYSE:XOM), and Wal-Mart (NYSE:WMT).

All things equal, data from an index of 500 companies is statistically more robust and representative than data from an index of 30 companies. However, volatility data from the Great Depression -- which exists for the DJIA, but not for the S&P 500 -- is nothing to sneer at. Turns out there were several peak volatility years, including a few when the DJIA volatility exceeded 2008 (which for the DJIA was ±1.59%):

  • -17% in 1929 (volatility: ±1.48%)
  • -34% in 1930 (±1.36%)
  • -53% in 1931 (±2.06%)
  • -23% in 1932 (±2.58%)

In 1933, the market rallied mightily (+64%) and as usually happens when a decline reverses, volatility dropped off sharply (albeit to a still-high ±1.98%). The single most volatile quarter in all this time was the original crash: ±3.04% in the fourth quarter of 1929. With the exception of an eerie calm in the first quarter of 1930, gyrations were relentless. 

Here is a quarter-by-quarter comparison of volatility, anchored by the 4Q29 and 4Q08 crashes:

Time Periods






















































The first row of this table displays the average daily volatility of the Dow Jones Industrial Average during the fourth quarter of 1928, and the daily volatility of the S&P 500 during the fourth quarter of 2007 -- one year prior to the respective crashes. Each subsequent line shows the average daily volatility for the next quarter. Note the peaks in the fifth row (4Q29-08).

The ghosts of the 1930s
It's natural to compare the crashes of 1929 and 2008, because there are a lot of similarities -- faltering economies, failing banks and businesses, high unemployment, and credit concerns, to name a few. And, of course, peak volatility.

From the perspective of volatility, the patterns leading up to and including the crashes were similar in 1929 and 2008. However, while we are not completely out of the woods, post-crash 2009 does not look as ominous as 1930.

In the 1929 crash, notwithstanding the gigantic dropoff in volatility in the first quarter of 1930, there was no sustained calming trend in the aftermath. Following the 2008 crash, we have had four straight quarters of declining volatility. This is a very good sign; we never even got two in a row from the fourth quarter of 1929 to 1933. Also, of course, 2009 was an up year in the market (as is usually the case when volatility declines), while 1930 was a down year. 

Still, the ghosts of the 1930s linger. Hopefully, in 2010 we will get improved economic performance, a decline in unemployment, and another good year for the market, accompanied by volatility that dips back to or below the ±0.61% average.

That should exorcise the ghosts -- and convincingly disrupt the 1929-2008 similarity in volatility patterns -- until the next incidence of systemic risk.

Check out another of our guest columns -- "The Volcker Rule and Congress' Unlearned Lesson."

Foolish guest contributor Brad Hessel currently has no position in any of the equities mentioned; however, Brad's clients may have such positions. The Fool's disclosure policy includes certain trading restrictions that apply to Brad. However, his clients are not subject to our disclosure policy, and thus are free to trade any such equities. Wal-Mart is a Motley Fool Inside Value recommendation. Apple is a Motley Fool Stock Advisor recommendation. The Motley Fool has a disclosure policy.

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