Bull and Bear Market Volatility Look Very Different

Last week the S&P 500 Index fell almost 2 percent over the course of a couple of days. Losses are a normal part of the equity markets, but you could forgive investors for assuming this was a substantial pullback given that market volatility has been nonexistent for more than a year. You have to go all the way back to late June of 2016 for the last drop of 5 percent or more. The last double-digit drawdown for the S&P 500 occurred in early 2016.

Not only have the losses been relatively shallow, but since the beginning of 2015, volatility has been about one-third lower than its long-term average going back to 1928. Plenty of investors are wondering if this is the calm before the storm. It’s quite possible that a storm in the financial markets is fast approaching, yet history tells us that the calm typically lasts much longer than the storm and using volatility is not a foolproof way to predict a coming bear market.