Every so often in (American) football, there’s one of those plays where a player gets the ball, runs to one sideline, reverses, runs toward the other sideline and ultimately gains like two yards of field position even though the player cumulatively ran for way more than that. A lot of work for little gain.

The market feels a bit like that to me right now. The S&P 500 just closed at 3,130.12 and was at 3,128.21 a week ago. In between, the index had daily changes of -0.4%, -4.4%, -0.8%, +4.6%, -2.8%, and +4.2%. Those are big swings. And, even though the market is basically back to where it was a week ago, there was huge volatility in between.

Since markets feel crazy right now with all these big swings, it would be interesting to compare the current degree of choppiness to other historical time periods. To do this, we can look at all of those individual daily percentages and take the absolute value (aka make them all positive) and add them up to get a measure of the total distance the index travels in a given time period. I used ten days as the interval for cumulative addition but there is no reason you couldn’t use another number. Performing this calculation for the last 92 years gives you this cool visualization:

What I find fascinating about this chart is how much it reminds me of another random topic I find super interesting - rogue waves. Waves in the ocean are fairly predictable but every so often some monster forms that is a huge number of standard deviations from the sample wave population for a given time and place.

The issue is that these huge rogue waves should be almost “statistically” impossible under a simple framework yet happen with much greater frequency than would be expected. Or, so we think. Rogue waves rarely leave behind eye witnesses and are believed to be responsible for a significant number of unexplained naval disappearances throughout history. It is only in recent years that their theorized existence has been confirmed through the analysis of various kinds of measuring devices out in the ocean.

So, markets are kind of calm or there is some light bumpiness but nothing unexpected and then BOOM huge volatility. That’s what happened over the last couple of weeks. And, while not on par with the monster rogue market waves seen in 1929, 1987, or 2008, it is still shocking.

There seems to be some relationship between these spikes in volatility and recessions but clearly a spike doesn’t imply recession. Sometimes, markets just go rogue and freak out. Or, there is crazy unexpected news (like a potential pandemic) that causes things to go haywire but may not necessarily mean a recession is on the horizon.

Situations don’t always develop as intended but the key is the amount of uncertainty. Maybe COVID-19 slowly dies out. Maybe a hundred million people die. No one knows for sure but no one can really say what is going to happen and so the uncertainty interval is massive. And, the choppiness in the market is an indicator of that uncertainty. (Assuming one factor drives the market here - which doesn’t have to be the case as uncertainty can be multi-variable, each with their own range of uncertainty spectrums.)

In the same way that naval engineering has evolved to account for the potential, previously unthinkable, stresses that could occur from rogue waves, so too should market participants always be prepared for periods of great uncertainty.

Uncertainty tends to happen unexpectedly. Best to keep (at the very least) a plan for the worst and hope for the best! Rogue market shocks happen more frequently than simple statistical analysis might suggest. We should know that though - we just got to see one.

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