Good News: Volatility Is Making a Comeback

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The , and the narrower, price-weighted , rose 1.4% and 1.3%, respectively, on the back of a May employment report that did not look strong enough to support an imminent tapering of quantitative easing (bond-buying) by the Fed.

Investors' relief was palpable in the options market, as the , Wall Street's fear gauge, fell just under 9%, to close at 15.14. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

Speaking of volatility, on Monday morning, I wrote that "investors ought to be prepared for some volatility leading up to, and following the release of, Friday's big figure." In this instance, I was correct, as the trailing five-day volatility in the S&P 500 this week was 7.8% (annualized) -- the highest level since April 22nd.

It's not just the magnitude of volatility, either. Over the past several weeks, the market has experienced a bit more downside volatility (i.e. more losing days) than investors had become accustomed to since the beginning of the year. And, while they may have found this unsettling, investors should understand that it is the one-way, lockstep market we have witnessed this year that is unusual -- not the other way around. The following table provides some evidence for this:

2013 (through May 15)


Full history, from Jan. 3, 1950


Source: Author's calculations based on data from Yahoo! Finance.

On a day-to-day basis, the market behaves very much like a random process, so it's not surprising that the ratio of winning to losing days is close to 50:50. Although 11-1/2 percentage points may not seem like much, a ratio that is close to 2:1 is a big departure from this. This is the sort of effect you come across when central bankers are  waving their experimental policy wands.

This morning's employment data suggests we still have some runway ahead of us before the Fed withdraws from the bond market; however, I suspect that the volatility genie is out of the bottle. Investors shouldn't expect as smooth a ride during the second half of the year as they have had so far.

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The article Good News: Volatility Is Making a Comeback originally appeared on

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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