So far this year the S&P 500 has had thirteen days where the index was up or down 2% in a single day (nine down and four up). This marks a large increase over prior years. In 2006 there were only two days where the index moved 2% in a single day (both up), while in 2005 and 2004 there were no days with a move of 2%. There are some who argue that the increase in volatility is a sign of a market top, implying that we may be entering a bear market. In the chart below, we illustrate the total number of days where the S&P 500 moved 2% by year. We also shaded years in which there was a bear market in gray (We defined a bear market as a 20% decline on a closing basis in the S&P 500).
In the bear markets of 1987 and 2000-2002, there was a large increase in the number of 2% days. However, for every bear market where the market showed increased volatility, there were also years where the S&P 500 saw a bear market and volatility did not show a meaningful increase (1956-1957 and 1966). Furthermore, there were also three years in the 1990s (1997-1999) where the S&P 500 had more 2% days than it did this year, and the market did not go into a bear market. So while the increased volatility can be stressful for the individual, it is not necessarily a harbinger of a bear market.