What a Volatile Start to 2019 Could Mean for Stocks

The bulls tend to emerge victorious in years when volatility starts high

Jan 14, 2019 at 1:03 PM
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Unless you've been hiding under a rock, you're probably aware that volatility has rammed its way back into Wall Street ala the Kool-Aid Man. In fact, 20-day historical volatility (HV) on the S&P 500 Index (SPX) was at 29% to start 2019, compared to just 6.2% heading into 2018, per Schaeffer's Quantitative Analyst Chris Prybal. The last time HVs were that high to start a year was in 2009. Below is what we might expect for the stock market this year, if recent history is any indicator.

Looking back at S&P data since 2000, we divided the years into quartiles, depending on where SPX 20-day HV was to start the year. Last year, for instance, ranked in the first quartile (lowest HVs), second only to 2011. This year started in the fourth quartile (highest HVs), just edging past 2001.

SPX HV quartiles since 2000

Looking at how the rest of the year plays out based on HVs out of the gate, it seems volatility breeds more volatility for the S&P, with both the steepest average loss and biggest average gain coming in that category.

For instance, the SPX was down about 8%, on average, two months into years when HV started strong, yet the index averaged a one-year gain of more than 12% -- the highest by far of any quartile. That compares to an average anytime one-year return of just 5.21%, looking at data since 2000.

SPX returns based on HV

So, if recent history is any indicator, even if the S&P continues to struggle heading into February, the bulls could emerge victorious before we flip the calendar to 2020. What's more, we're already defying the trend of a first-quarter slump, with the SPX up more than 3% at the January midpoint.

In the short term, speculators should keep an eye on short interest trends, as well as the hedge fund crowd. "All indications are these funds have very low stock exposure, and continued accumulation from this crowd could drive the SPX through resistance," according to Schaeffer's Senior V.P. of Research Todd Salamone.

 

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