The second quarter of 2021 has seen volatility in the core domestic equity market continue to decline, even as movement underneath the hood has remained elevated.

The second quarter of 2021 has seen volatility in the core domestic equity market continue to decline, even as movement underneath the hood has remained elevated. One of the most frequently used ways to measure the volatility of domestic equities is through the CBOE SPX Volatility Index VIX, which moved back to a negative trend last week in its descent to a near-term low of $14.50, the lowest level we have seen for the index since before the pandemic began. As we touched on last Friday, the index did reverse up from this level but continues to remain in a low field position relative to the past few months, having made a series of lower highs since February of this year. Another way to measure market volatility is through the number of extreme daily moves for the S&P 500 Index SPX, which we define as a daily gain or loss of at least 1% in our SPX Volatility Study. This study measures the number of extreme days for the core market benchmark and how that count relates to prior timeframes.

Last year saw an outsized number of extreme daily moves for SPX at a count of 111, significantly more than the 66-day average and the highest number of extreme days in a calendar year since 2009. Most of those days came early last year, as 68 daily moves were exceeded 1% in the first half of 2020. As we transitioned into 2021, we saw 18 extreme days in the first quarter, which was not nearly as many as 2020 but still higher than the average count at roughly 16 days. The second quarter has seen a continued reduction in the number of extreme days, as we sit at a count of just 11 days through movement on June 25, leaving us at 29 volatile days at this point in the first half of the year. While there are still technically 2 trading days in the first half of 2021 following movement Monday, we are currently below the average number of extreme days in the first six calendar months, which is roughly 33 days.

This theme is continued if we look at the number of daily gains or losses exceeding 2% for SPX, which climbed to a count of 45 days in 2020, 39 of which came in the first half of that year. We now sit at only 4 such days so far in 2021, which is lower than the average number of 2% daily moves at just over 7 days since our test began in April 1987.

This data certainly plays well with the movement seen in volatility indices such as the VIX, with large spikes last year being followed by subsequently declining volatility readings over the past six months. However, that is not to say that we have been immune to significant market moves this year. The continued rotation among sectors, sizes, and styles in domestic equity markets has made the level of volatility certainly feel much more elevated than the broad market readings portray. One of the most important relationships to monitor this year has been the ongoing battle between growth and value. The value camp has been one of the market leaders from a performance standpoint throughout much of the recovery rally, after having previously been out of favor for most of the past several years. Growth names encountered substantial headwinds with the sell-off in technology names during the first quarter but have demonstrated improvement over the past few weeks as the technology sector shows resilience. The back-and-forth movement for these two style classifications has also led to increased volatility readings for these breakdowns of the domestic equity market. This can be seen by applying the extreme daily moves approach toward representatives for growth (RPG) and value (RPV), to determine just how much the two areas have moved around relative to the broader market. For this test, we are limited to data from July 3, 1995, through June 25, 2021.

Interestingly enough, both RPV and RPG have had 51 daily moves of at least 1% so far this year, which is far more than the SPX count of 29. The value representative typically shows lower extreme movement in the first half, with an average count of just over 37 days, while the growth representative sees an average of just over 45 daily moves of 1% or more in the first half of a calendar year. These readings are each substantially lower than the numbers seen in the first half of 2020, with RPV and RPG seeing respective extreme daily move counts of 89 and 74 days over the first six months of last year.

While the actual count of extreme moves for each fund is the same at this point in the year, one would not expect the actual moves to occur at the same time. By looking at the quarter-by-quarter breakdown of 1% days for RPV and RPG, we can see that RPV has been relatively consistent from a volatility perspective, with 27 extreme days in the first quarter and 24 extreme days in the second quarter. Each of these quarterly counts was above the quarterly averages. On the other hand, RPG saw 33 extreme days in the first quarter which was higher than average, and only 18 in the second quarter, which was below average.

While each of the prior market environments examined had its own unique set of circumstances surrounding the movement between value and growth names, it is important to be aware of how the current environment relates to those timeframes. It is also important to note how the value and growth representatives performed during periods of enhanced or reduced volatility and how the two representatives behaved after such occurrences. Interestingly enough, RPV only saw its count of extreme days in the second quarter be higher than the average during 9 out of the 27 years examined. The value fund posted an average gain of 6.58% during those years, which was the highest average return for any quarter that saw more than 18 extreme days. We were slightly below that performance over the past three months, as RPV sits at a quarterly gain of 5.85% through last Friday. Interestingly enough, the average forward return for the third quarter following those 9 instances arrives at a gain of 8.99%. While we will have to wait and see how the next three months play out, this does provide a positive indication for the value camp over the next few months.

As previously mentioned, the growth fund saw its extreme day count fall below the quarterly average over the past three months. This happened in the second quarter for 15 out of the 27 years examined for RPG, producing an average second-quarter return of 2.87% in those years. The return over the past three months has been substantially higher, coming in at a gain of 10.14%. In looking at the forward third-quarter returns from those 15 instances, we actually see an average loss for RPG of -0.69%. Again, this does not necessarily mean that we should expect RPG to decline in the next three months, but it does point toward the potential for more muted returns for growth names following a period of more muted movement.