March 29, 2024

Off the Charts: Market Volatility Aplenty, and a Change May Be Afoot

Over the last three months, there has been day after day of wild swings in prices. 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 last three months in private contemplation, without any information about what was going on, could have emerged this week and concluded, from the stock market, that it had been a quiet time for all.

The accompanying charts introduce the concept of “excess volatility,” which is defined as the movements that were not needed to get from one point to another. Rather than focus on how many days had large moves, they look at how much a market backtracked during a 13-week period, or about three months.

Large amounts of backtracking occur rarely, and seem to come when the economy is changing course, confusing investors as to whether the old trend is over. As can be seen in the charts, excess volatility often rises when the economy is entering a recession — or leaving one. But it also can reflect changes in market structure and trading strategies that cause price swings until markets adjust to the new techniques.

The figures shown in the charts are calculated by comparing the net change of the S. P. 500 over a 13-week period to the total of daily moves.

The index closed at 1,260.34 on Aug. 3 and was at 1,237.90 on Wednesday of this week, for a net decline of 22.44 points, or 1.8 percent. But during that period, the total move of the index was more than 1,392 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 traveled nearly 1,370 points more than it had to and that the excess volatility figure was 109 percent, the highest figure since 2009.

There were several violent swings of excess volatility during the Great Depression, but from 1940 through 1987 the figure never got as high as 100 percent. In early 1988, the excess volatility index peaked at 116 percent, largely because of the Oct. 19, 1987, crash, which caused a one-day drop of more than 20 percent in the index but proved to have little lasting economic impact.

The next time the index topped 100 percent 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 last three months came on speculation that a new recession might be starting. Moves upward, meanwhile, 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.

Floyd Norris writes about finance and the economy at nytimes.com/economix.

Article source: http://feeds.nytimes.com/click.phdo?i=b022004bfdb33bc0b6dcc4262c291b9a