EVAN HOROWITZ | QUICK STUDY
Stock markets don’t move gracefully. After Monday’s white-knuckle collapse, Tuesday brought a wild down-then-up frenzy which ended up producing the largest one-day gain since 2016, pushing the Dow Jones industrial average up 567.02 points, or 2.33 percent.
But if the unpredictable fluctuations of the last few days seem especially nerve-rattling, that’s partly because the market had lulled us into a false sense of security, with 15 of the most consistent, least volatile months in history.
To put the current situation into perspective, it helps to look back at prior sell-offs.
When the Dow fell by 1,100 points on Monday, it was widely bewailed as the largest-ever decline in terms of raw points. But in percentage terms, the drop-off amounted to a less-dire 4.6 percent, making it just the 100th worst day in the Dow’s history.
On Black Monday in 1987, the Dow fell 23 percent, and then another 8 percent one week later. During the worst of the 2008 financial crisis, the index dropped at least 7 percent on four different occasions.
The S&P 500 is generally considered a better, broader index of the stock market, and there, too, the current picture is one of relative calm compared with a more tumultuous past. Not once in all of 2017 did the S&P fall more than 2 percent. By contrast, the typical year brings four such downturns. Sometimes there are many more — in 2011, for instance, there were 21 daily declines that exceeded 2 percent.
Insiders have their own, more sophisticated measures of volatility — like the VIX index, which captures investors’ expectations about future price fluctuations.
Here again 2017 ranks as one of the most stable years for investors, a period in which fortunes were made by betting that already low volatility would only diminish.
So while it’s tempting to think of the recent, sharp downturn as a menacing aberration, an unaccountable drop in an otherwise upward-trending market, perhaps it makes more sense to say we have returned to normalcy.
If anything, last year was the aberration, an usual and unsustainable calm in a world known for turbulence.
And while it might be tough on our collective sense of balance, a volatile stock market isn’t necessarily bad news for the economy at large.
When Wall Street collapsed on Black Monday, Main Street America mostly shrugged. Quarterly gross domestic product growth that year was nearly 7 percent, the best showing of any quarter in 1987. And the unemployment rate, which had been trending down all year, kept right on falling.
This time around, the receding stock market might once again land like a feather on the rest of the economy. Indeed, by one theory, the downturn is actually a good sign for workers, evidence that their wages are about to go up — and that investors are unhappy because higher labor costs mean lower corporate profits.
For the market madness to trigger a real economic crisis, something more dramatic would have to happen. For example, if people beyond Wall Street felt rattled, and lost confidence in the future, that might dampen spending. Or if businesses suddenly decided to shore up their balance sheets by paying down debt, rather than making new investments, that, too, could hurt economic growth.
But the recently passed Republican tax cuts count as a kind of insurance against these scenarios, giving consumers more money to spend and businesses new incentives to invest.
For now, it seems like the biggest risk might be the whiplash that comes from a year full of up-and-down headlines about how the market doesn’t always giveth, but also taketh away.
Welcome back, volatility.
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