2016 was not an especially volatile year for equities

by on January 5, 2017 at 2:46 am in Current Affairs, Data Source, Economics | Permalink

Cliff Asness reports:

Maybe it’s just me but a lot of end-of-year commentary about financial markets in 2016, implicitly and sometimes explicitly, makes it sound as if it was a crazy year. It wasn’t. In fact, it was amazingly normal. This is true of at least the S&P 500 (I’m not going to be more ambitious here) which is what I think many of these commentators are talking about.1,2

Annualized daily volatility during 2016 came in at 13.1%. Based on rolling same-length periods going back to 1929 this falls at the 47th percentile.3 You say you don’t want to compare to the craziness of the Great Depression? Maybe that leads to everything else looking calm and you don’t think that’s meaningful. That’s reasonable. Well, that same value of 13.1% is at the 54th percentile since WWII and the 42nd percentile since 1990. Pretty darn normal. Maybe people are comparing to very recent times (I would argue in error) and have been lulled into a false sense of calmness now shattered by 2016? Nope, it’s still only at the 54th percentile when compared to the last five years. Realized daily volatility simply was not high in 2016 compared to pretty much any prior period (it certainly wasn’t exceptionally low either).


The S&P 500 was +9.5% in price return in 2016.

Here is the source, there is further evidence and discussion of the metrics at the link.

1 Pshrnk January 5, 2017 at 5:23 am

This Time Was Not Different

2 Rich Berger January 5, 2017 at 6:32 am

Total return (including dividends) was approximately 12%. Over time, dividend reinvestment has a big effect.

I like Asness. I enjoyed his 10 Pet Peeves –

3 Brian Donohue January 5, 2017 at 9:48 am

“price return”? C’mon Tyler, you can’t do this in the new normal.

4 Cliff Asness January 5, 2017 at 4:36 pm

You get basically the same story in total or excess return. I discussed it in one of the footnotes. For one year risk purposes (any of the three ways) it really doesn’t matter. Almost all the vol within a year is from price movements.

5 Brian Donohue January 5, 2017 at 6:48 pm

I understand. My comment was tangential to the point you were making in the article, I just think in a 4% world, expressing stock returns over a period like a year without reflecting dividends is a bit distorting when compared with other investments.

6 Cliff Asness January 5, 2017 at 7:43 pm

I should just move on, but then I’d be someone else.

The point is precisely that it does not matter a hill of beans for the question I’m addressing. So you’re typing to hear the keyboard clicks, and then saying you get it, but then repeating the silliness.

The secondary point is I addressed this directly in the footnotes.

The third point you will have to figure out yourself but it’s really subtle and important,

There is no fourth point.

There is a fifth point but it’s also a secret.

7 Brian Donohue January 6, 2017 at 8:58 am

I understand. I understood.


8 Axa January 5, 2017 at 7:31 am

Indeed, equities were “stable”.

Forex is another story. EM currencies are still falling. The GBP has not rebounded. Perhaps journalists put in the same box equities and forex trading.

9 Meets January 5, 2017 at 9:26 am

Hashtag I wish it was still 2016.

10 mobile January 5, 2017 at 9:45 am

How does something come in at the 54th percentile when there are 5 (6?) observations?

11 Lord Action January 5, 2017 at 9:58 am

Rolling annual windows. There are roughly 90 years and roughly 250 trading days in a year, so he’s looking at roughly 4500 such windows. They overlap, so arguably there are only really about 90 observations but the difference shouldn’t matter much.

12 Cliff Asness January 5, 2017 at 4:37 pm

Lord Action is correct (I enjoyed typing that).

But how do you get 5 or 6?

13 Rock Lobster January 5, 2017 at 9:46 am

2016 felt strange to me because the market’s reaction to events felt very inconsistent, not because it was high-vol per se.

In Jan and Feb the market tanked, seemingly catalyzed by some nothingburger data on the Chinese economy that played into commodity jitters. Maybe it was a bigger deal than I’m giving it credit for but the market basically just forgot about it after February. Energy and other commodities took a huge hit, and from reading the news it seemed like every energy and mining company was going out of business. The HY energy index was yielding almost 21% at the peak in February, and metals & mining was 16-17%. They went on to be the best-performing sectors of the year in HY. The severity of this drop compared with the relatively benign remainder of the year was again swiftly forgotten about

Also going on throughout the year was a negative equity reaction to lower oil on a day-to-day basis, even when it was clearly supply-driven (e.g. OPEC news), which was rather odd in my opinion.

Then you had Brexit which made global equities tank followed by a quick and inexplicable recovery.

Finally you had the U.S. election. In the run-up to it, markets went up on news that was positive for Hillary, to a degree that implied a let’s say ~10% decline if Trump won. He then won and futures fell 5% overnight. The market was relieved by his non-crazy victory speech, and futures recovered to being down “only” 3%. The next morning the market opened down a half a percent or so as I recall, and wound up being up for the day. Since then the market has surged. Square that circle for me.

Looking at the market right now, I see a lot of enthusiasm for corporate tax reform and fiscal expansion (oh the irony), but not a lot of pricing in of geopolitical risk.

So 2016 may have been unremarkable from a pure vol perspective, but it sure seemed weird in context.

14 Jeff R January 5, 2017 at 9:48 am


15 Dzhaughn January 5, 2017 at 1:23 pm

What is really weird is that Astrological forecasts said nothing about the Cubs, Cavs, and Leicester City winning.

What is really really normal is that you (and others) fail to read what you just wrote and ask “Do my theories of market valuation have any value at all?”

16 Hadur January 5, 2017 at 9:51 am

According to pundit predictions, two things happened in 2016 that should have wiped out my retirement account: Brexit and Trump. The market bounced back very quickly from those two.

Perhaps we need to reexamine the idea that political instability must result in the stock market tanking? What if a well diversified portfolio of stocks is now the place to park your money during uncertain times? What if economic activity occurs largely independently of political activity?

17 Hadur January 5, 2017 at 9:59 am

Like, Trump won and the next day I still ordered paper towels from Amazon.com and took an Uber home from the bar.

18 Alain January 5, 2017 at 10:32 am

What if the entire class of journalism opinion has negative value add? What if their view of the world, their models, are so horrible as to make any opinion they have worthless? What if their power to intimidate causes other classes, like stock fund managers or economists, to not vocalize their real opinions. That all that really can be trusted is prices as people need to actually spend resources to influence those?

19 gab January 5, 2017 at 11:59 am

“What if the entire class of journalism opinion has negative value add?”

Sorta like internet commenters?

20 Sean January 5, 2017 at 12:22 pm

VIX is a much better measure of fear/uncertainty than daily volatility.


VIX was very low this year. VIX was 14, vs. an average of 20 from 1990-2015. VIX was 19 back in 2014.

21 Cliff Asness January 5, 2017 at 4:38 pm

Yes same story. I should’ve looked at the VIX too.

22 Sean January 5, 2017 at 12:35 pm

Overall volatility was really low in equities.

However the volatility of volatility seemed extremely high. I think we had a 6 week stretch of the lowest volatility in 30 years maybe longer. And also stretches of very high volatility. I think I blame this mostly on robot trading. Replaced traditional market makers were are more patient and provide real liquidity. They make bigger profits and keep volatility a little higher when things are calm, but when others are scared the old human traders were there to step in.

23 Sean January 5, 2017 at 12:55 pm

Treasury yields also have the largest move since 1980 (Which was volker years) while having fairly low vol most of the year.

So I think the way he is measuring vol is correct, but not accurate to describe the year. A lot of records were set last year for historical vol (Both on low and high side) and in different asset classes. I think its mostly because of robot traders.

24 Cliff Asness January 5, 2017 at 7:47 pm
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26 Kitty January 6, 2017 at 8:03 am


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