According to Justin Walters of the research firm Bespoke Investment Group, there have been 283 swings in the Dow of at least 4 percent since 1900. That’s less than 1 percent of the 30,414 trading days. More than a tenth — 10.95 percent — of those have come since October 2007. It’s the same for the 622 days plus or minus 3 percent and 1,735 plus or minus 2 percent days since 1900.
The data confirm what you’re probably feeling: This is nuts. It used to be that swings of 1 percent in equity markets were considered normal levels of volatility. And 2 percent moves were even less common. So if it seems like wild swings in the market are more frequent than ever, that is because they are.
But why all the Sturm und Drang?
A few weeks back, we discussed the reasons traders were rethinking risk. A combination of the slowing economy, a potentially weakening profit picture and European bank problems had finally convinced them that stock prices were too high.
But what investors really need to understand comes down to one word: Trend.
Markets tend to move in long-term cycles. The overall economy oscillates through periods of greater and weaker growth. These are driven by big macro factors that last not for quarters or even years, but decades. These changes lead to significant economic changes and are often the impetus of major expansions. Then, after a decade or two, they fade and are replaced by periods of softer growth, or worse.
Over the past century, numerous “secular” long-term trends have played out. The results have been surprisingly predictable. After the 1929 crash and Great Depression, markets floundered. It took until 1954 — 25 years! — to return to the nominal market highs.
The long economic trend after World War II was very supportive of markets. Millions of servicemen returned home, married, had kids, created the baby boom. We created suburbia, built out the interstate highway system. And after years of footing the wartime effort, the private sector could once again refocus on peacetime production of goods and services. All of this begat a huge expansion, and from 1946-66 we had a 20-year secular run in stock markets with 500 percent in gains.
But all good things must come to an end, and the market topped out in 1966. The Dow hit 1,000 that year, and it would not get above 1,000 on a permanent basis for 16 years — until 1982.
Markets may have been flat over this period, but they lost ground to inflation. In that long flat era, there were shorter term cyclical trends. Over that 16-year secular bear period, we had five major rallies that picked up between 25 to 75 percent, and five major sell-offs, including a 56 percent drop in 1973-74.