Janice R. Andrews
The truth that market volatility is a double-edged sword was brought home to investors this past week. The S&P 500 (^GSPC) saw its largest daily increase for the index in 2024 on Thursday, rising 2.3%. Only three days had passed since the index saw its worst one-day loss of the year prior to this rebound. The recent swings demonstrate how erratic the market can be, particularly when there is a lot of volatility.
An Exciting Journey for the S&P 500
This week’s sharp fluctuations in the S&P 500 serve as a reminder that market volatility is not limited to down. The abrupt gains and losses that occur in a brief period of time bear witness to the unpredictability of the financial markets. Since mid-July, these variations have been more noticeable, and the volatility of the CBOE’s Volatility Index (\VIX) has reflected this turmoil. At one point on Monday, the VIX, sometimes known as the “fear gauge,” surged from the teens to over 65, suggesting increased investor concern.
The Impact of Volatility on Market Movements
Market volatility is mostly determined by the magnitude of changes rather than the direction of the market, as DataTrek’s Nicholas Colas pointed out. Significant market fluctuations are frequently correlated with high levels of volatility, yet these swings are not necessarily bad. The Thursday jump in the S&P 500 is a perfect illustration of how volatility may result in both significant profits and losses.
While excessive volatility often results in poorer one- to three-month returns, Colas pointed out that the market’s behavior can be particularly unexpected during tumultuous times. This week’s volatility was evident in the way that the largest single-day gain of the year was sparked by initial unemployment claims, an economic statistic not usually linked to market rallies.
Volatility’s Psychology
The S&P 500’s greatest and worst days of the year followed each other in quick succession, which highlights the significance of investor psychology during times of market turbulence. Steve Sosnick, chief strategist at Interactive Brokers, gave advice that might sound contradictory in these unsettling times: investors should think about doing nothing. Although there is a great desire to respond rashly to market fluctuations, Sosnick’s guidance places a premium on perseverance and long-term planning.
Although it may be hard to accept, investors must accept the fact that large gains and large losses can occur simultaneously. This idea was reinforced in a 2024 projection update from chief investment strategist Brian Belski of BMO, who, in spite of his optimistic perspective, expected a sizable decline in the S&P 500. Belski cautioned that most bull markets have an average 9.4% decline in their second year, in addition to calling for a year-end price forecast of 5,600 for the S&P 500.
Belski’s Forecast in Operation
At least in part, Belski’s forecast seems to be coming true. The market’s collapse on Monday produced an 8.5% drop from the recent peak, which was in accordance with Belski’s prediction. This downturn serves as a reminder that investing in the equities markets entails volatility. It was noted by Colas that “volatility is the price you pay for equity market returns.” To see long-term benefits, investors need to be able to withstand these changes.
The Price of Unpredictability
Volatility may bring about large profits, but it can also bring about large losses. For investors, volatility presents both a difficulty and an opportunity because of this duality. Over time, those who can handle the ups and downs are frequently rewarded with larger returns. But the experience might be overwhelming for people who are unprepared for the psychological toll that unpredictable markets can have.
The way the market has been acting over the last week emphasizes how crucial it is to keep a long-term outlook when things are very volatile. The sudden increases and decreases in value serve as a warning that short-term market fluctuations are frequently unanticipated. Sometimes the wisest course of action is to do nothing and let the market work its course, as Sosnick urged.
Getting Ready for More Volatility
Investors should prepare for ongoing volatility going forward as the market manages economic uncertainty. The VIX just spiked, indicating that market mood is still brittle and that more changes are probably in store. But as past events have demonstrated, volatility is an inherent feature of the market cycle, and long-term rewards are frequently bestowed upon those who maintain their composure and discipline.
To sum up, market volatility is a two-edged sword that can result in big profits or losses. The wild trip the S&P 500 took this past week is evidence of the unpredictability of financial markets, particularly in times of increased uncertainty. Although volatility can be unsettling, it can also present an opportunity for long-term investors who are prepared to stick with their plan. As they say, “volatility is the price you pay for equity market returns,” and there may be significant benefits for those who can withstand the ups and downs.
