We'll use Mr. Asness' tweet as the intro:
From AQR, Dec. 19:
I know that, unfortunately, a large fraction of my blogs fall into
the category of “viewed properly this isn’t that big a deal.” This one,
about this year’s overall U.S. stock market return, is another. Also
unfortunate, is how much we need commentary like this (not just mine!).
This world is pretty much designed to convince us that we’re always at
DEFCON 1, when 5 is the mode and 4.5 the mean.
1
There are some interesting, and perhaps even actually extreme, things
going on this year (e.g., breadth of losses across many investments and
investment styles). But the overall U.S. stock market is not one of
them. However, if you, for instance, watch cable business news too much
and absorb the headlines (e.g., “it’s the worst December since the Great
Depression!”, “did you see the POINT drop!”) you’d be forgiven for
thinking the S&P 500 is on a death march. So, while perhaps
repetitive in theme and pedantic, those of us repeatedly pointing out
the near constant exaggerations are, I hope, doing something useful.
This post is really simple and short. I’m just going to look at daily
returns on the S&P 500 and compare 2018 year-to-date (YTD) to
similar length periods over history.
2
The YTD annualized daily volatility of the S&P 500
3
as of December 17, 2018 is 16.5%. That puts it at the 66th percentile over history going back to 1928.
4
So, sure it’s above median, but if that’s your standard for harrowing,
you’ve led a rather sheltered life. It’s 29% of the maximum we’ve ever
seen over the same length of time and, to make sure the maximum wasn’t a
freak occurrence, it’s 43% of the 95th percentile rolling volatility
ever observed. That just ain’t a very big number.
If we look at actual returns,
5
2018 YTD is at the 24th percentile versus comparable history. Below
average, sure, but could you imagine the blaring headline “Freakish year
that only happens one quarter of the time!”
Looking at the drawdown (comparing the endpoint of December 17, 2018
to the high point within 2018), it’s at the 22nd percentile. Meaning
it’s a worse drawdown than experienced over 78% of the similar length
periods (using drawdowns from the peak within 50 week look-back periods
here again to make it an apples-to-apples comparison). Again, that’s a
mildly bad year versus history. But, again, that’s also nothing to
write home about (or, frankly, to write about at all!).
This isn’t exhaustive. There may be some measure or scale that shows 2018 to be truly exceptionally difficult.
6
For instance, as mentioned above, broadening things globally, and to
other asset classes like bonds and commodities, and perhaps even to
known systematic strategies, likely shows this to be a more surprisingly
bad year. Breadth is likely a bigger outlier than depth.
7
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