Why Perspective is Important When Thinking About Volatility

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Credit: Shutterstock

Change is a constant. The rate of change is not. The global economy has undergone a monumental shift over the past two decades. Mathematician Clive Humby is credited with the phrase, "data is the new oil."

While we still consume massive amounts of fossil fuels and other goods, companies focused on technology are the primary symbols of the modern economy. As such, the Nasdaq-100® Index (NDX) has arguably become the barometer for the 21st century economy.


Source: Nasdaq

For example, in the late 1990s, General Electric (GE) was the most valuable company in the world. In 1998, GE had a market cap of $230 billion. At the same point, Apple (AAPL) was worth around $2.3 billion, making GE 100 times the size of Apple. Today, AAPL is worth about $2.2 trillion. It’s the most valuable company in the world. Microsoft, Alphabet, Amazon round out the top six (which also includes Saudi Aramco). GE is currently worth about $72 billion (global rank #184). The tide has changed and now Apple is 33 times the size of General Electric.

So when we talk about change and the rate of change, we're also talking about volatility, but we need to be clear about what we mean when we say "volatility," because its meaning changes depending on how you look at it.

Volatility & Perspective

Volatility is a "statistical measure of the dispersion of returns for a given security of market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured as either the standard deviation or variance between returns."

In the context of capital markets, volatility is simply a measure of change over a given time frame. Volatility is agnostic. A typical (historical) volatility metric gives you the standard deviation of daily returns. Regardless of the time period (10 days, 20 days, 30 days, etc.), it’s expressed as an annualized term. Volatility is a rote calculation.

By contrast, in everyday life, volatility has a different connotation. When something is described as “volatile,” there’s an inherently negative tone. Humans have a profound desire for predictability, and “volatility” upsets our brains’ predictive capabilities. Every one of our decisions has a predictive element. In general, these choices are easier when things move slowly (think: traffic/crossing an intersection). The Oxford English Dictionary defines volatility as follows: the liability to change rapidly and unpredictable, especially for the worse.

From this perspective, volatility is negative.

I contend that volatility (like so many other things in life) is about your perspective. Ben Carlson, portfolio manager at Ritholtz Wealth Management, explained the topic well in a post entitled Volatility is not Your Enemy. Some elements of perspective are within your control and others are not. Let’s use the recent dip in the Nasdaq-100 Index as an example.

Nasdaq 100 index drawdowns

Source: Portfolio Labs

The sequence of returns plays a critical role in these examples. Imagine you’re in your 60s and on the verge of retiring when your net worth declines by nearly a third. It’s difficult to maintain perspective in that situation. Typically, as investors move toward retirement, active risk management becomes a focal point.

Now, assume you’re a 30-year-old with the same portfolio. Your nest egg is also down nearly 30%, but you have a different time frame. You’re not dependent on that investment capital in the near term. Theoretically, you can continue to buy the Nasdaq-100 at 30% off. Who doesn’t like a sale?

Market Vol

U.S. equity markets have been unusually volatile as of late. The earlier point about volatility being agnostic is once again on display. The Nasdaq-100 Index has experienced big moves both higher and lower over the past few weeks. Big picture, the NDX declined by about 28% from the late November highs to the late May lows. The index then rallied more than 12% (intraday) and 9.5% on a closing basis into the June 3 Nonfarm Payroll data.

Volatility is non-directional.

Let’s give it some perspective. As of June 2, 30-day realized volatility on the NDX was 43%. If we excluded two months in 2020, it’s the highest measure for that (backward-looking) volatility metric since the height of the European Sovereign Debt Crisis (remember the PIIGS) in late 2011. The market has been moving with unusual velocity.

NDX rolling 30 day volatility

Source: Portfolio Labs

The average true range for the Nasdaq-100 futures (daily) looking back three weeks is 3.6% of spot (reference average close 12,265.62). At the risk of dating myself, trading has recently been like trying to finish level 38 on Frogger (apparently there are only 38 levels). The cars and logs are moving quickly! This is a market fraught with uncertainty, risk, and opportunity.

Frogger screenshot

Source: Atari 5200

From a rolling calendar year perspective, there’s an interesting asymmetry when we look at the past year. The “top” for the Nasdaq-100 in late November and the recent “bottom” were separated by six months. Since the November 2021 “top,” the average intraday range for the NDX (U.S. hours) has been 2.43% of spot. The chart below plots the daily changes for NDX (blue line) with the average daily range over the same time frame (green line).

Nasdaq 100 index daily changes

Source: Bloomberg/Nasdaq

Now let’s compare those changes (both daily and average) to the previous six months. The chart below plots the same measures between early June and late November of last year. The scale remains the same because it illustrates how different the period before the market peaked (below) and subsequent months (above) have been.

Nasdaq 100 index daily changes

Source: Bloomberg/Nasdaq


Predictions are based on reference points. In general, we anticipate that the future will look like the recent past. Between June and late November of last year, the most significant NDX daily decline was -2.16% (10/4/2021). By comparison, over the past six months, there have been 24 sessions where the NDX fell by more than 2.16%. The largest daily drop was -5.1% (5/18/2022).

Let’s look at gains. The largest daily NDX gain between June and late November of last year was +1.88%. There have been 25 sessions where the NDX jumped more than 1.88% over the last six months. Things are different. Your frame of reference has likely changed.

Future Volatility

The future path remains uncertain. Index options continue to price the potential for significant end-of-year volatility. Those same options can be used to express your outlook on volatility or to manage directional exposure over a specific time frame. The economy and U.S. equity indexes will continue to change. Their values and makeup reflect the world as it exists, one that changes dynamically.

Nasdaq® is a registered trademark of Nasdaq, Inc. The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Neither Nasdaq, Inc. nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding Nasdaq-listed companies or Nasdaq proprietary indexes are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.

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Kevin Davitt


Kevin Davitt is the Head of Nasdaq’s Index Options Content. Kevin spent years focused on options education with an index emphasis at Cboe Global Markets. Prior to his exchange work, Kevin traded index, equity, and commodity futures and options as a market maker at a variety of well-known firms. Davitt is a graduate of Marquette University. He’s a proud Evans Scholar alum and enjoys reading, live music, running and coaching youth baseball.

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