Will 2014 Bring Higher Volatility?

by Dan Wiener | January 2, 2014 12:47 pm

Will 2014 Bring Higher Volatility?

Stock market investors may get a whole lot less, and a whole lot more than they bargained for in 2014.

Less in terms of returns. More in terms of volatility. Just to recap, the Dow index gained 26.5% in 2013, its best showing since 1995’s 33.5% gain. The index hit 52 all-time highs this year.

And, for all the sturm-und-drang around the government shutdown, sequester, taper, etc., it was as if the stock market had taken a “chill pill” in 2013.

First, the 10,000-foot view. You can see that over the past decade the daily volatility in the Dow has gone from mellow to manic and back.

low volatility Will 2014 Bring Higher Volatility?[1]

In fact, 2013 was most like 2006 on a number of different metrics. Again, let’s look at the Dow Jones Industrial Average. For instance, there were just 3 days in 2013 when the Dow moved 2% or more, the lowest number of 2% days since 2006 when there were none. 2013 also saw the smallest number of days when the Dow moved 2% or more intraday — just five — matching the five days when the Dow moved 2% or more intraday in 2006.

Even moves of 1% or more were muted, with just 26 days in 2013 when the Dow moved 1% or more (or 23 days when it moved between 1% and 2%.) There were just 24 such days in 2006.

Dow Jones Industrial Average

djia dow jones Will 2014 Bring Higher Volatility?[2]What does all this mean? Well, the pessimist would tell you that what followed 2006 was 2007, the peak of the market before its blow-off, year-end that preceded the disaster that was 2008.

I’ll present the optimist’s version, which is that low volatility has brought enough calm to the market to begin to heal some of the still-painful wounds many investors suffered during the last bear market. A mellow 2013 doesn’t foretell a disastrous 2014.

However, I would caution that 2014 is not going to be a repeat of 2013 when it comes to volatility. I expect more days with greater sweeps of the market from high to low, and back. And I would not be at all surprised to see the markets correct a good 10% which will scare many neophyte investors back to the sidelines, will make bonds look good once again (for returning assets rather than producing a return on assets) and will prove once again the benefits of diversification.

Happy New Year. 2014’s going to be fun!

Senior Editor Dan Wiener and Editor/Research Director Jeffrey DeMaso publish The Independent Adviser for Vanguard Investors[3], a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds.

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2014/01/low-volatility.png
  2. [Image]: http://investorplace.com/wp-content/uploads/2014/01/djia-dow-jones.png
  3. The Independent Adviser for Vanguard Investors: http://investorplace.com/order/?sid=HK8361

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