The Stock Market is Very Noisy

One of the difficult points to convey about the stock market is how indiscriminate it is.

I’ll try to make this point with some math.

I looked at the numbers going back to 1955. The S&P 500 gains, on average, about 1/37th of 1% each trading day. In other words, if the market was represented by one $37 stock, it would gain, on average, one penny each day. (Bear in mind that I’m discussing long averages.)

The average standard deviation is almost exactly 1%. That means the stock price swings, on average, 37 times the stock’s value. That’s just the average; it can be a lot more than that. So each day, 36/37th of the market is complete noise.

(Side note: Financial markets are not log-normal but that’s not a big deal for the point I’m trying to make.)

That noise part of trading decreases very slowly. After one month (21 trading days), the market gains an average of 0.57% while the standard deviation rises to 4.49%. There’s still a lot of noise.

At one year (253 days), the average gain is 7.03% with a standard deviation of 15.6%. That means it’s a hardly a big deal to see a market loss in one year.

At four years, the average gain and standard deviation finally become equal at just over 31.2%.

At one decade, the market’s return is about twice its standard deviation (95% to 49%).

Keep this mind the next time you hear someone predict what the market will do over the next few weeks.

Posted by on October 24th, 2017 at 1:30 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.