Thursday, September 01, 2011

Volatility Likely to Subside

The following commentary was released earlier to subscribers of the Forbes Special Situation Survey investment newsletter.

August was a particularly trying month for equity investors. During the first six trading days alone the S&P 500 Index lost a whopping 13.4%. Even though stocks rallied nicely over the last seven trading days, the Index still lost 5.6% for the full month. That’s the kind of return one might expect for a full year. For a single month, it is extremely unusual.

Perhaps more surprising was the extremely high level of volatility. While investors know that buying stocks is risky, few investors, if any, expected to see the kind of explosive volatility that has plagued the markets in recent periods. It wasn’t this way when 2011 began. At the start of the year, the markets were quite calm, but the incidence of large price swings began to rise as the year progressed. This surge in volatility is seen quite clearly in the table below. The table notes the number of trading days for each month on which the S&P 500 moved up or down by at least 1%. For example, there were only three trading days in January on which the Index moved between 1% and 2% and there was none on which it move by more than 2%. Now take a look at August. The difference is stark. In August the Index moved by more than 1% on 14 trading days. On six of those days it moved by at least 4% and on one remarkable day it moved by more than 6%; unfortunately, that was a down day. Since there were only 23 trading days in the entire month, these are rather remarkable statistics.

Stocks recommended by the Forbes Special Situation Survey were also hit by this staggering level of volatility and most closed lower. One stock, however, bucked the trend. Remarkably, Research in Motion (RIMM) surged 30% in August. Of course, that does not negate the fact that RIMM is still down by half since we recommended it in January. It does demonstrate, however, how sudden changes in investor sentiment can cause violent movements in stock prices, both up and down.

Given the economic uncertainties in the U.S. and abroad, volatility will likely remain high, yet it should subside well below the levels seen in August. A calmer market alone could give individual investors the confidence they require to start buying stocks again.

Vahan Janjigian and his clients at Greenwich Wealth Management have positions in the stocks mentioned in this column.