Expect More Ups and Downs
If history is any guide, the 416-point slide in the Dow Jones industrial average on February 27 is likely to lead to a period of rising volatility. Sam Stovall, chief investment strategist for Standard & Poor's, recently studied the behavior of the stock market following major declines that took stock prices down by 2 percent or more.
Since 1959, there have been eight other periods when stocks plunged 2 percent or more in a single day following an extended period of low volatility. He found that in the 12 months that followed such dates, market volatility–as measured by the gyrations in the Standard & Poor's 500 index–jumped 33 percent on average.
And on a couple of occasions, in the 1970s, volatility rose more than 68 percent. As a result, "it appears very likely that we will experience an upsurge in volatility for the S&P 500 in the coming year," Stovall says.
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