One of my pet peeves is the frequent use in media headlines and in the marketing materials of financial services firms of the phrase “uncertain and volatile economy and financial markets.” It is everywhere and just isn’t true! The first chart shows the standard deviation or volatility of GDP which is the broadest measure of economic activity. There was actually a huge spike in volatility during Covid when the economy declined 33% in the first quarter of 2020 only to recover very strongly in subsequent quarters. Since these fluctuations were totally artificial, I smoothed them out for the purposes of this graph although some of that volatility is still captured in the spike toward the right side of the graph. While economic growth does fluctuate, the message is that the overall economy has been relatively stable since the mid 1980’s, the period to the right of the vertical black line. While not shown on this chart which only dates back to 1947, GDP volatility during the Great Depression was about twice that of the highest reading between 1947 and 2024. So, this chart actually understates today’s stability in comparison to longer term U.S. economic history.
What about the stock market; is it as volatile as some would like us to believe? The following chart illustrates rolling volatility of the S&P 500 since 1871. That should be a long enough time frame to provide meaningful perspective!
The huge spike in stock market volatility in the left center of the graph occurred from 1929 to the 1940’s encompassing the Great Depression and World War II. Since then, the stock market has been relatively stable although there are modest wiggles here and there. Most important, there is no indication of an upward drift.
So, there is no evidence that we live in a volatile and unstable world, at least as regards the economy and financial markets. We will still have up and down markets and risk management remains important. However, let’s dismiss the sensationalist headlines!