For the first five months of the year, stocks were on an upward trajectory, seemingly unaffected by potential head winds such as the fiscal cliff, European debt and sequestration.
Through May 21, the S&P 500 rose 17%, breaking all-time highs on almost a weekly basis. Even the start of the traditional “Sell in May” period couldn’t slow the markets. Analysts were forecasting a correction for months, and every time, stocks just kept motoring higher.
Simply put, market volatility has returned. The VIX — which measures market volatility in the S&P 500 – shot up to its highest level since February this afternoon. It’s up 37% since May 17.
As always, a spike in the VIX – a.k.a. the “fear gauge” –has meant a decline in stocks. Since reaching a new record high of 1,669 on May 21, the S&P has declined 3.3%. That’s not quite a 5% drop-off that usually denoted a true pullback. It’s been over 200 days since that’s happened.
But the market has certainly been way less predictable of late.
Market Volatility: Looking Ahead
The Dow Jones Industrial Average has either added or lost 100 points in 10 of the last 30 trading sessions. From May 23 through June 4, the S&P alternated up days and down days for seven straight sessions. That’s a far cry from the month that preceded it, when the index advanced every day but four.
Much of the sudden volatility can be attributed to an overbought market that was long overdue for a short-term pullback. But investors have also become more thin-skinned in recent weeks, easily influenced by global economic issues the way they were for much of a topsy-turvy 2011.
A weakening yen and volatility in Japanese stocks have caused panic in markets around the world. Ben Bernanke’s vow to “taper” the Federal Reserve’s stimulus efforts have also raised concerns about the long-term health of the U.S. economy. And the dollar has reached its lowest point in almost four months.
Things like that didn’t matter for the first four or five months of 2013. The March 1 sequestration deadline passing without a deal barely caused a rustle on Wall Street. Japan was all but irrelevant. And the monthly Fed announcements were largely met with universal indifference.
Now all those things matter. Investors are no longer tuning out the news, hanging on the daily ups and downs of the global economy.
For now, market volatility has returned.