Yahoo Finance Why a volatile Q1 can be bullish news
While history may not repeat itself, it can rhyme from time to time.
This quarter, which officially wraps up today, is one of the most volatile first quarters on record. The year began with an intra-quarter loss of 11.3% in the Dow Jones Industrial Index (^DJI), as implied volatility (^VIX) spiked above 30. But does a does a volatile Q1 mean a bumpy ride for the rest of the year?
Examining all the first quarters in the Dow with a drop of 10% or more—and there have only been 18 of them—reveals some potentially bullish news. More often than not, the markets are able to bounce back and notch gains for the rest of the year. Two-thirds of the years had positive returns from Q2 to Q4.
The worst case scenario occurred in 2008, with a Q1 loss of 12%, followed by losses in all subsequent quarters. The market ended down 34% for the year.
On the other hand, the best case scenario occurred in 1933. The first quarter suffered an intra-quarter loss of 18%, but was able to come back strongly, ending up 64% for the year.
However, it already looks like this quarter may buck historical trends. Going back to the mid-1920s, out of all the previous first quarters with high volatility, this would be the first one to close flat or positive.
Meanwhile, implied volatility has fallen to lows not seen since last August, as investors expect the Fed's accommodative policy stance to continue.
While the calm markets may not last, at least history points to some potentially positive news after what was a rather harrowing start to the year.
