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Four Hundred Dow Points Aren’t What They Used to Be Amid Record Volatility

Date: Thursday, December 1, 2011
Author: Whitney Kisling and Inyoung Hwang, Bloomberg

What does today’s stock rally equal in past markets? About half as much.

The Dow Jones Industrial Average (INDU) reached 12,045.68, up 490.05 points from yesterday’s close. Adjusting for the market’s volatility in 2011, the gain is equal to about 240 points in the first nine years of the last decade, Bloomberg data show.

Europe’s sovereign debt crisis has fueled some of the biggest stock swings ever during the last four months. The Standard & Poor’s 500 Index has moved 1.7 percent on average each day, compared with 0.8 percent before September 2008, when Lehman Brothers Holdings Inc. collapsed, according to data compiled by Bloomberg.

“It feels like a good day, but whether or not it’s sustainable is another thing,” Hayes Miller, who helps oversee about $43 billion as the Boston-based head of asset allocation in North America at Baring Asset Management Inc., said in a telephone interview. “We’re not buying it. This rally isn’t going to shake us from being more cautious on risk assets for the first half of 2012.”

The Dow surged 4.2 percent, the most since March 2009, after central banks acted to make additional funds available to lenders. JPMorgan Chase & Co. (JPM) and Bank of America Corp. advanced at least 7.3 percent today as the Federal Reserve and five central banks lowered interest rates on dollar swaps and China cut banks’ reserve requirements.

Central Banks

The S&P 500 gained 4.3 percent to 1,246.96 today as only 10 stocks fell. The index has risen 7.6 percent in three days, the most since March 2009. More than 10 billion shares changed hands on U.S. exchanges today, compared with the three-month daily average of 8.77 billion.

The S&P 500 has climbed 3 percent or more in a day 36 times in the three years since Lehman’s collapse, or about once a month. That compares with 27 times for the nine years before, or about 0.3 times a month, data compiled by Bloomberg show. The Dow’s intraday move has exceeded 100 points every day in November except one, Nov. 18.

Equity markets worldwide have been tumbling since July 22 as the U.S. had its credit rating slashed by S&P and investors speculated the European debt crisis is spreading. The VIX (VIX), as the Chicago Board Options Exchange Volatility Index is known, has averaged 33.5 since then. While it fell 9.3 percent to 27.80 today, dropping below 30 for the first time since Nov. 11, it’s still 35 percent above its average since 1990.

‘Human Behavior’

“In terms of natural human behavior, markets become more volatile when there’s higher level of uncertainty as to the economic outlook worldwide,” Richard Skaggs, the Boston-based senior equity strategist at Loomis Sayles & Co., which manages about $160 billion, said in a telephone interview today. “In 2011, we faced a number of questions -- is China slowing and by how much? In Europe, we have moved from a slow-growth forecast to a consensus that it’s due for at least a mild recession. In the U.S., there’s potential for a double-dip recession.”

Speculation about Europe’s debt crisis has been spurring near-lockstep movement in equity prices. The correlation of S&P 500 (SPX) companies to gains or losses in the full index increased to a record 0.86 last month, according to data compiled by Birinyi Associates Inc. in Westport, Connecticut. A level of 1 would mean all 500 stocks moved together. Correlation was 0.79 yesterday, 74 percent higher than its average since 1980.

The Dow alternated between gains and losses of more than 400 points on four days in August, the longest streak ever.

Hedge Funds

The swings have taken a toll on professional investors. Less than 24 percent of 542 categories of funds tracked by Morningstar Inc. have topped their benchmark indexes this year, the fewest since at least 1999. A Hedge Fund Research Inc. index of industrywide performance has fallen 3.3 percent this year. It’s only the third annual loss since 1990 and the biggest decline since 2008, when it plunged 19 percent, according to data from the Chicago-based firm.

“We had the worst Thanksgiving week since the ‘30s and then you turn around, you have a 8 percent rally in three days,’’ William Nichols, senior managing director in equity trading at Cantor Fitzgerald LP in New York, said in a phone interview today. ‘‘Everything is great in terms of this nice move, but you look year-to-date, the Dow is up 3 percent, the S&P is still down and the U.S. is outperforming other markets.’’

Investors who ignore the swings and focus on record corporate earnings may be better off, David Kelly, who helps oversee $394 billion as chief market strategist for JPMorgan Funds in New York, said in a phone interview.

Bear Market

The S&P 500 gained or lost 2 percent or more almost three times a month during the bear market that began in 2000, data compiled by Bloomberg show. That’s about three times the average between 2002 and September 2008. Stocks ended up recovering and the S&P 500 went on to reach a record high of 1,565.15 in October 2007.

‘‘If I’m a long-term investor, I’d try to ignore the volatility,” Kelly said. “To me the most remarkable thing in all these screens today, the S&P 500 is within 10 points of where we are at the start of the year,” he said. “It’s very important for long-term investors to recognize that most of the zigs were offset with zags.”

After Lehman’s bankruptcy spurred the biggest financial crisis since the Great Depression, the S&P 500’s daily moves averaged 2.8 percent through March 2009, according to data compiled by Bloomberg. While the index has surged 84 percent since March 9, 2009, it has fallen 8.6 percent since April 29 and dropped 0.9 percent in 2011.

Strategist Forecasts

Strategists expect the S&P 500 to end the year at 1,274, according to the average of 12 projections in a Bloomberg survey. Their forecasts range from 1,130 to 1,425.

The benchmark measure of U.S. equities has averaged a 2.1 percent move between its intraday lows and highs during the past month, compared with the 1.3 percent average since 1982, according to data compiled by Bloomberg. The 30-day average reached 6.9 percent in October 2008, the highest in record.

“Uncertainty is high,” said Brian Belski, Oppenheimer & Co.’s New York-based chief investment strategist, in an interview today on Bloomberg Television’s “In the Loop” with Betty Liu. “Investors aren’t investing, they’re just trading and reacting to these sound bites.”

To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net