The stock market has moved a lot since March, up and down. On Friday, the US stock markets took a market sell-off into a second day with substantial movements on both days. But this is not just a recent thing. Since March, the volatility of the stock market has ramped up from what was taking place over the past couple of years.
Yes, the times are different. Yes, radical uncertainty is everywhere. And this is not going to change before the presidential election is over. Whether or not that date in November 3rd or some other date following. And there is nothing really that the policy makers can do about it. Investors are just going to have to live with it.
Driving The Market
As mentioned, there are just so many uncertainties around besides the uncertainties surrounding the election and the inauguration of a president in January.
The uncertainties go from the pandemic itself, to the economic recovery or not, to the US/China trade relations, to the development of a vaccine. Things are going to change daily and markets are going to move daily.
Overall, the US stock markets continue to perform toward the upside. Yesterday, the NASDAQ recorded only the third “down” day out of the past 14 days. Every “up” day was a new historical high.
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For the S&P 500 stock index, yesterday was only the fourth “down” day out of the past 13 days, and every “up” day was a new historical high.
The “market” seems to be under the influence of the Federal Reserve System, and given the Fed’s new approach to inflation targeting, investors seem to think that this will mean longer periods of monetary ease accompanied by longer periods of low interest rates.
Both of these is a positive for continued high stock prices. But the volatility in the marketplace has changed.
Take A Look At The Volatility Index
Let’s take a look at the volatility index. We can see from the chart that the VIX index of volatility begins to take off in the middle of February…February 20 to be exact. This is when the news of the spread of the coronavirus pandemic really took off. As they say, the rest is history.
A month later, on March 16, the VIX index hit its peak of 82.69. The stock market hit its low right about then and then recovered to where it stands today.
The current level for the VIX index is in the upper 20s, a value more than twice what it was before the steep rise in February and March.
This is something that investors are going to have to live with through the end of the year…at least.
There is another issue at work in this present environment. Algorithmic models that automatically set in motion trades tend to make the volatility even more extreme.
This is described in the Financial Times. As technology takes over Wall Street, the use of these models not only produces very good results, but also makes the outcomes more extreme as they contribute to the volatility that exists.
A rise in the expectation of volatility will set off these models and, as happened on Thursday, will set off automatic selling. These are called momentum models.
And given that these models are built up upon market statistics, they are also biased to the more volatile part of the market, like the market in tech stocks. That is, when the selling begins, tech stocks will dominate the sales and, like yesterday, tend to dominate the market results.
Following on top of this, “nervous retail investors” who had bought heavily into the tech stocks rally now began selling “out of fear of seeing more large downward movers.”
This now is just a part of how the market works. And although market values were down substantially for the day, in the early afternoon, the major stock indexes were down by almost 40 percent more than where they ended up the day.
According to David Lefkowitz, head of Americas equities at UBS Global Wealth Management, the market selloff was driven “more by market technicals than any fundamental change for the outlook for corporate profits or the economy.”
And this is the way it is going to be. There is a lot that will be going on over the next two to three months, and with all the unknowns that investors are facing, swings like yesterday and today should be expected.
And with all the unknown unknowns that investors face, this market volatility could continue on into the new year.
Hold on to your hats!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.