Now We’re Talking Volatility

If the gyrations of the equity market today were not enough, we are in a historically unusual situation where 3 of the last five business days have had moves on the S&P 500 of over 4% in absolute terms.  Since 1928, how many times has that happened?  69 times.  Dig this:

So, on average, you make money investing during volatile times, but the possibility of moderate-to-severe loss is significant.  Those losses came in the Great Depression era (as did the huge gains), but for those that have read me a long time, you know that I believe that a second Great Depression is not impossible.  I don’t care how much policymakers say that they have learned, the system has an odd way of mutating to create the same result through a new process.  The market always has a new way to make a fool out of you.

Aside from the crash in 1987, only the depression era has had similar volatility, and they had it for a long time.  Even 1973-74 did not rate under that measure (though it resembled the Chinese water torture).

Take this with a grain of salt.  A salt shaker even.  Eddy Elfenbein and Bespoke often do analyses like these, and they have a certain wisdom most of the time.  But data-mining is always dangerous.  The question that must be asked is whether there is a mechanism to explain the results.  In this case, there is.  Volatile markets scare investors away, and drive prices down, in general.  This causes stock to move from weaker to stronger hands, i.e., from the weakly capitalized to the strongly capitalized (now I get to send my electricity check to Mr. Buffett).

So, ask yourself this: are we heading into a depression?  If not, buy some stock.  Personally, I’m not certain about whether we aren’t heading into a depression.  I view it as a 25% chance now.  Perhaps my next article will help explain.  As for me, I am continuing my normal policy of having 70% of my net worth in risk assets.