By Saqib Iqbal Ahmed
NEW YORK – Volatility has been the watchword for markets in the last several months, as worries over a hawkish Fed, sky-high commodity prices and geopolitical tensions stemming from the war in Ukraine roil asset prices.
The S&P 500 was recently down 1.2% on Friday and yields on the benchmark 10-year Treasury were at a near 4-year high of 3.12%, capping off a week that saw massive swings in stocks and bonds in the days following the Fed’s monetary policy meeting.
Here are charts showing how volatility has broken out across markets and various factors driving the moves.
GRAPHIC: Volatile world – https://fingfx.thomsonreuters.com/gfx/mkt/gkplgkewnvb/Pasted%20image%201651850464155.png
A VOLATILE YEAR
Volatility has surged across asset classes over the last year, with stocks, bonds, currencies and commodities all experiencing more pronounced moves. Worries over how aggressively the Fed will tighten monetary policy in response to surging inflation has been a key driver of the moves, sparking gyrations in fixed-income markets, boosting the dollar to 20-year highs and weighing on stocks.
Concerns over how monetary policy tightening by central banks will affect global growth have recently come to the fore, with the Bank of England warning Thursday that Britain risks a double-whammy of a recession and inflation above 10% as it raised interest rates to their highest since 2009.
GRAPHIC: Real bad – https://fingfx.thomsonreuters.com/gfx/mkt/mypmnyroevr/Pasted%20image%201651850295599.png
THE REAL DEAL
Another culprit – linked to expectations of a hawkish Fed – has been the sell-off in Treasuries which sent yields on the 10-year past 3% for the time since late 2018 on Thursday.
As yields climb, they can dull the allure of stocks, particularly those in high growth sectors such as technology, where companies’ cash flows are more weighted in the future and diminished when discounted at higher rates.
“If rates are going to shift into a higher range, then that begets a new valuation regime,” wrote Michael Purves, CEO of Tallbacken Capital. “Regardless of the fundamentals, the process of regime shift is inherently volatile.”
Meanwhile, real yields on the U.S. 10-year Treasuries – which subtract projected inflation from the nominal yield – recently turned positive for the first time since March 2020, eroding a key support for U.S. equities.
GRAPHIC: Stock swings – https://graphics.reuters.com/USA-MARKETS/VOLATILITY/znpnemgbevl/chart.png
As a result, the year has so-far been marked by big moves in asset prices, especially equities. Through May 5, the S&P 500 has logged 44 daily moves of one percent or more so far this year – the second highest total in at least a decade and twice the number it had registered at this point in 2021.
Graphic: Dip-buyers feel the pain – https://graphics.reuters.com/USA-MARKETS/VOLATILITY/lgvdwgbnapo/chart.png
BUY THE DIP?
Volatility has weighed on investors and hammered sentiment. One possible casualty may be the strategy of buying the dip, or taking advantage of stock market weakness to scoop up shares.
While dip buyers were generally rewarded over the last two years, as a dovish Fed helped buoy markets, stepping in to buy on weakness has become far riskier in recent months. There have also been signs that retail investors – who have been avid dip buyers in the past – are more hesitant to do so.
Still, some investors see little evidence of the outright panic that has tended to mark past market bottoms.
“To find a bottom we typically like to see a vol spike, panic and another leg lower in (the S&P 500) to turns things around, wrote Christopher Murphy of Susquehanna International Group, in a Friday note.
An even more aggressive policy tightening by the Fed could potentially lead to such a state of panic, he wrote.
“That of course risks breaking some unforeseen things and would result in a lot of pain.”
(Reporting by Saqib Iqbal Ahmed; writing by Ira Iosebashvili; Editing by Nick Zieminski)