Has the stock market become more volatile?
As a major component of the international financial market, the stock market has an important role in recognizing global financial winds. Due to the friction generated by transactions in various countries and the growing volume of transactions. In the 1990s, it could take more than three years for an overvalued stock to escape its accumulated excess. But recently, it only took 14 months to complete.
Let’s take the US stock market as an example, the S&P 500 has risen 119% since the March 2020 low for the U.S. stock market through early 2022. Looking back in history to 1932, the average bull market cycle for the S&P index was 32 months. The trend in 2022 is likely to be more volatile than the previous two years, and the return of the overall portfolio will be more dependent on alpha rather than beta. Looking at various macro factors, the well-known ones such as the Fed’s interest rate hike, accelerated reduction in bond purchases, and the uncertainty brought about by the new crown and variant virus will have a fundamental impact on US stocks. In this article, I will briefly explain the volatility of today’s stock market.
Energy shocks and geopolitical tensions have driven inflation expectations out of control. Failure to make an orderly transition to net-zero emissions could exacerbate the situation.
The stagflation of the 1970s is back, with yields soaring across the board and risk assets falling.
At the same time, with rising energy and commodity prices, economic growth has slowed, especially in Europe. Rising supply-induced inflation and uncertainty about the COVID-19 pandemic have hit economic activity, further dragging on growth and triggering a surge in long term yields, leading to a severe recession and inflation. Yield volatility has hit stocks hard. At the beginning of June 2022, as high inflation data shook financial markets, pushing the S&P 500 out of a range that had stabilized for the month. Investors, who have gained 9% since nearly entering a bear market on May 20, were caught off guard by the latest sell-off.
The massive sell-off trend in the stock market has caused valuations to plummet. After peaking at more than 30 times earnings a year ago. The S&P 500’s price-to-earnings ratio shrunk by roughly 40% from its trough in May. Nearly as much as it contracted throughout the 2000-2002 crash.
In other words, valuation revisions are happening three times faster than the dot-com bubble burst.
At the same time, the Russia-Ukraine incident exacerbated inflationary pressures and put central banks in a dilemma.
War not only disrupts international trade, but even makes containing inflation an even bigger blow to growth and employment, without providing a buffer against growth shocks. In addition, the war between Russia and Ukraine has brought to the fore the issue of energy security. Bringing an additional energy supply shock on top of the original supply chain challenges caused by the Covid-19 pandemic. Along with the political events, the S&P 500 fell 19% from its peak in January to its trough in May. Moreover, just experiencing its third contraction of at least that magnitude in four years.
Confusingly, the S&P 500 has somehow delivered solid results. Amid four years of incredible volatility and uncertainty, with investors all waiting for the market to stabilize. While volatility and uncertainty can be signs of trouble ahead, they also often portend great opportunities. There is a lot of uncertainty about what is going on, including inflation, oil, global macroeconomic events. I think we may have some volatility going forward, possibly throughout the year.