History Repeats?

Written by Nathan White, CFA

Stock market chart, originally uploaded by shannongolladay.

There are certain events that happen in your lifetime that you always remember, such as getting married, the birth of a child, etc. Experiencing the worst market decline ever is probably not an event you want to have on your list.

These are definitely historic times.

I thought it would be interesting to post this chart to illustrate the current circumstances in the stock market.

This chart shows how the current market volatility compares with other tumultuous times going back to 1957. You can see that volatility spikes above 2.5 coincide with major market sell-offs and bottoms. In hindsight, these were great buying opportunities as evidenced by the significant rallies that occurred after each spike.

That brings us to the current situation which as you can see is literally off the charts!

Theoretically, a 6 percent standard deviation event is expected to have a 0.0000001973% chance of occurring! Of course that is based upon the theory that markets follow a normal distribution or in my words in a "normal world."

The problem is that real life is often anything but normal. So now we find ourselves in the present "historic" situation where the market decides to destroy all investments and all of the accompanying strategies and models no matter how successful they have been.

I'm a big believer that history repeats itself, but never in quite the same form.

If you are looking for a silver lining to all of this craziness just look at what happens after the volatility spikes and remember that during the spikes people become convinced that the bad times will never end and bad news permeates everything.

Sound familiar?