Global stock markets continue their wild ride.
Yesterday the S&P 500 (an index of the largest 500 US companies) experienced one of its most volatile days in recent times, as the market digested various headlines coming out of the Ukraine conflict.
Over the last century, you could expect on any given day the most the S&P 500 might move to be around 1% in either direction, but usually less than that. Yesterday alone it gyrated more than 1% seven times, seven!
That’s a lot of ups and downs in one day and is a direct result of the high level of uncertainty right now. When markets don’t know what to do, they tend to react to headlines.
For long-term investors, swings like this can be baffling.
If you’re asking yourself “if each day’s headlines contradict the previous day, then why react?” Well then, we think you’re onto something.
And here’s the thing, volatility is volatile. It can change. Historically, periods of high volatility have been followed by periods of low volatility.
It’s not unusual for commentators to declare a new era of volatility, and perhaps this time they’re right. But in 2008/2009 daily market swings were common, similarly during the European banking crisis, the China trade war, and the pandemic.
You get the point.
The VIX index is a widely recognised measure of volatility. Below we can see how the VIX index has had periods of high volatility and then returned to calm.
The largest spikes in the chart were the 2008 financial crisis and the pandemic. Today’s reading of 35 is high by historical standards but every time we have been here before over the last 20 years, the index has fallen.
We might be entering a multi-year period of continued uncertainty, and therefore volatility. But if history is any guide, we might not.
So while we don’t want to dismiss out of hand the challenges faced by stock markets, which are plentiful, the point is, when the outlook seems bleak, it's the bad stuff that attracts the headlines. Just like it’s the good stuff that gets cheered during happier times.
The hope is volatility lives up to its name and reverts back to being, well, less volatile.
Sign up to Honey by Freetrade, our market newsletter.