Thursday, April 23, 2020

Stock Market Volatility in the Time of Covid-19

To believe newscasters, stock markets rise when there are more buyers than sellers and fall with the converse. To consummate a transaction, there must be both a buyer and seller. It is more proper to say that stock markets rise when more people are motivated to buy shares than sell them at a given price. To balance that optimism, sellers require more money to part with their shares. Similarly, price declines reflect that to induce people to purchase shares, they must lower prices. Whatever the motivations, at the point of transaction, both parties have agreed to a price.

General agreement on the prospects for stocks results in little volatility in prices. As what were expected future profits become actualized, current prices rise to reflect the time value of money. As new information becomes available to estimate future profits, individual stocks will increase or decrease—causing what little volatility there is.

Several methods exist to gauge the stock market’s price volatility. The measure I’ll use for this blog is the daily percentage change in prices of the S&P 500 Index[i]. Because we are concerned only with how much the market changed each day, not whether it rose or fell, we use the absolute value[ii] of the percentage price change.

Historical Averages

For the ten-year period ending April 22, 2020, the average absolute value percentage change was .82%. The current S&P 500 Index is ~2,800. Applying the long-term expectation means that, on average, daily prices change by 23 points. Not every day is the same, and standard deviation[iii] measures the variability around that average. The larger the number, the more the variability. For the 10-year period, that was 1.04%.

So, the two key measures for the 10-year period are .82% average change with a standard deviation of 1.04%.

The 2020 Experience

In the beginning of 2020, the stock market was relatively calm. From January 2 through February 19 (the day the S&P 500 reached its all-time high), the average change was .57% and the standard deviation during that time was  .44 (or .50 when comparing those thirty-three daily results to the long-term average change). This calm trading behavior suggests everyone seemed to think they had the temperature of the market.

That stability has changed markedly since the record high. In the forty-four trading days since (from February 20 through April 22, 2020), the average percentage change has exploded to 3.62% with a standard deviation of 2.73 (or 3.91 when comparing those daily results to the long-term average change!). The expected daily change of 23 points has exploded to an actual average of 101. Not only has the daily percentage change more than quadrupled, the variability of the daily change has also skyrocketed.

Meaning What?

Yeah, fascinating for the number geeks, but what does that mean? My interpretation is that until we have clarity on two issues, everyone is shooting in the dark. Each daily statistic shines a penlight worth of knowledge into a mammoth cave worth of unknowns, and yet the markets react: hence massive volatility. Issue number one is how much damage are businesses experiencing? First quarter reports will come out soon. They reflect half a quarter of boom times and the rest of responding to Covid-19 shelters-in-place. Corporations will not be providing forward guidance about the second quarter or later. This data will only partially answer the first question. The Federal Reserve continues to prop upthe economy and Congress continues to throw money (and ballooning deficits beyond anyone’s imagination just two months ago) at the problem.

And still we do not know what the short-term damage will be.

Worse, we have no certainty about what the longer-term damage will be. Today’s weekly unemployment new claims data are projected to be 4.5 million[iv], yielding 26.5 million new claims during the month. The unemployment rate will exceed 15%.

Initial words from pundits suggested a V-shaped recession: quick decline and rapid recovery because financial imbalances did not cause the problem, and the economy was so strong before the Covid-19 damage. The decline part is correct. I am not optimistic about the quick recovery.

Our chances of screwing things up seem much larger than our opportunity to do it exactly right. The U.S. approach has been to focus primarily on keeping businesses solvent so they can resume operations once governments raise the green flag. It won’t have been enough for some retail operations and many restaurants, which is why there is pressure to reopen as soon as possible. But, reopening businesses too early gives the virus an opportunity to re-accelerate, causing renewed and longer shutdowns. Delaying reopening causes rank-and-file employees to dip further into savings or go further into debt, neither option allowing them to spend at previous levels.

In short, an economy that is 70% driven by consumer spending can’t bounce back to previous record-low unemployment without everything returning to normal. Unless Covid-19 magically disappears or treatments become highly effective, I don’t see a quick restart.

Many supply chains will not seamlessly restart because Covid-19 is affecting various parts of the world in different manners. Most spring events with large gatherings are canceled. Many are already canceling summer events, and planners are already canceling some fall events. Each of these has run-on effects for the hospitality industries and airlines. All this yields more uncertainty.

Which means, volatility will remain high for some time until the economy’s future becomes clearer. That resolution will determine whether the stock market is over-valued or under-valued.

[i] All data based on information provided by
[ii] The absolute value of a negative number is determined by changing the negative sign to a positive sign. E.g. the absolute value of -1 is +1
[iii] Standard deviation is the square root of the variance. Variance is defined as the sum of the squares of the difference between each individual value and the mean of values, that total divided by the number of values

James M. Jackson authors the Seamus McCree series. Full of mystery and suspense, these thrillers explore financial crimes, family relationships, and what happens when they mix. Furthermore, a novella is the most recent addition to the series. You can sign up for his newsletter and find more information about Jim and his books at

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