Market's wild volatility has resulted in barely a ripple

RARELY has a sharemarket been so wild and moved so little.

By InvestSMART · 8 Nov 2011

By InvestSMART ·
8 Nov 2011

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RARELY has a sharemarket been so wild and moved so little.

Over the past three months, there have been wild price swings daily.

Stocks soar when it appears that Europe will manage to work out a rescue plan for Greece. They plunge when it appears the world may be entering a double-dip recession.

But the Standard & Poor's 500-stock index has moved almost nowhere.

An investor who spent the past three months in private contemplation, without any information about what was occurring, could have emerged this week and concluded from the sharemarket that it had been a quiet time for all.

The index closed at 1260.34 on August 3 and was at 1237.90 on Wednesday, for a net decline of 22.44 points, or 1.8 per cent.

During that period, the total move of the index was more than 1392 points, as it rose more than 684 points on good days and fell more than 707 points on bad days. That meant that the index travelled nearly 1370 points more than it had to and that the excess volatility figure was 109 per cent, the highest figure since 2009.

There were several violent swings of excess volatility during the Great Depression, but from 1940 to 1987 the figure never got as high as 100 per cent.

In early 1988, the excess volatility index peaked at 116 per cent, largely because of the October 19, 1987, crash, which caused a one-day drop of more than 20 per cent in the index but proved to have little lasting economic impact.

The next time the index topped 100 per cent was in late 2002, as the market was reaching its lows after the collapse of the technology stock bubble in 2000 and 2001.

Then, in 2008 and 2009, it climbed to new post-Depression peaks as share prices approached a low after the credit crisis led to a deep recession.

Much of the downward volatility of the past three months came on speculation of a new recession.

Moves upward came when economic optimism rose. The high level of excess volatility could signal that the economy's recent slow growth is due to change but it is not clear what that change might be.

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Frequently Asked Questions about this Article…

Why did the market feel so "wild" even though the S&P 500 barely moved?

Over the past three months the S&P 500 showed large daily swings but ended almost unchanged. The index fell just 22.44 points (about 1.8%) from 1260.34 to 1237.90, yet its total upward moves exceeded 684 points on good days and its total downward moves exceeded 707 points on bad days. That combination of big daily swings and a small net change is why the market felt volatile while the headline index appeared stable.

What is "excess volatility" and why does a 109% reading matter for investors?

Excess volatility measures how much the market has traveled beyond what the net change implies — essentially the sum of all the big upswings and downswings. A 109% reading means the market moved about 1,370 points more than it needed to given the small net change. The article notes 109% is the highest since 2009, indicating unusually large day-to-day swings, which signals elevated uncertainty for investors.

What drove the recent big daily swings in stocks?

The article highlights two main drivers: optimism when it looked like Europe might strike a rescue deal for Greece, and sharp sell-offs on speculation that the world could be entering a double‑dip recession. In short, shifting headlines about Europe and recession fears produced the wild daily moves.

How can the market travel thousands of points but end up almost unchanged?

Because the index experienced large gains on some days and large losses on others. Over the three months the total magnitude of those moves added up to more than 1,392 points, even though positive and negative moves largely offset each other, producing a small net decline of about 1.8%.

Does a high excess volatility reading mean a market crash or deep recession is coming?

Not necessarily. The article points out historical precedents: excess volatility topped 100% around the 1987 one‑day crash (which had little lasting economic impact), in late 2002 after the tech bubble, and in 2008–09 during the global credit crisis. A high reading signals elevated uncertainty and big swings, but it doesn’t by itself predict the economic outcome.

What historical periods had similarly high excess volatility?

The article notes very high excess volatility during the Great Depression, a peak of about 116% in early 1988 tied to the October 19, 1987 crash, another spike in late 2002 after the technology bubble collapse, and post‑2008–09 peaks during the credit crisis. The recent 109% level is the highest since 2009.

What does this pattern of big swings but small net change mean for everyday investors?

The article suggests that an investor who missed the headlines might think it was a quiet period, even though markets were swinging wildly day to day. That mismatch underscores that headline index levels can hide significant underlying volatility and uncertainty — a reminder to pay attention to market risk and the drivers behind price moves.

Could the excess volatility tell us anything about the economy's slow growth?

The article says the high level of excess volatility could signal that the recent period of slow economic growth is due to some kind of change, but it also cautions that it’s not clear what that change might be. In other words, the volatility hints at uncertainty around the growth outlook without providing a definitive explanation.