This is the main conclusion from today’s morning letter, which you can read to register to receive in your inbox every morning, along with:
The S&P 500 (^GSPC) rose 2.3% on Thursday, the index’s biggest daily gain so far in 2024.
Just three days earlier, the S&P 500 recorded its biggest one-day loss of 2024.
Market volatility has been rising since mid-July. The CBOE Volatility Index (^VIX) jumped sharply on Monday, from teens to over 65.
But as our Chart of the Week shows, market volatility has less to do with market direction and more to do with the size of moves.
As DataTrek’s Nicholas Colas wrote this week, high levels of volatility typically spell a blow to returns over one to three months. That means the common association of volatility with “down” isn’t entirely unwarranted.
But while the market is never very predictable in the short term, it is especially unpredictable when things are more volatile. As Colas joked, who would have thought that the initial jobless claims would be the biggest day of the year?
And the fact that the best and worst days on the calendar are so close together underscores the advice Steve Sosnick, chief strategist at Interactive Brokers, gave to Julie Hyman in her column earlier this week: Investors should seriously consider doing nothing.
The lesson that big wins and big losses can go hand in hand may be hard to absorb, but it’s showing up everywhere. And after this week, it’s hard not to think about BMO Chief Investment Strategist Brian Belski’s 2024 outlook update in May.
While he made one of the biggest decisions on Wall Street at the time — setting a year-end price target of 5,600 for the S&P 500 — the relentlessly optimistic note indicated that a major pullback was likely in the coming months, based simply on the fact that most bull markets average a 9.4% second-year decline.
And with Monday’s rout putting the price 8.5% below the recent high, Belski’s call appears to have come true. The first part, anyway.
But you can’t have one without the other. Colas pointed out the old adage that “volatility is the price you pay for stock market returns.”
Or put another way: the money is there to withstand the volatility.
Ethan Wolff-Mann is a Senior Editor at Yahoo Finance who writes newsletters. Follow him on X @ewolffmann.
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