Over the past few sessions, volatility has reigned supreme on Wall Street.
Outsize moves in U.S. equity benchmarks have come at a daily clip lately. And you can blame coronavirus or Bernie Sanders or the Federal Reserve, but wild intraday swings and dramatic intersession moves may be here to stay, say strategists and market experts.
Look no further than Wednesday’s move for the Dow Jones Industrial Average DJIA, +4.53% , which notched a 1,200-point intraday gain, putting it on pace for its best weekly advance, up more than 6.6%, since 2011, as of Wednesday’s close. That is just after the blue-chip gauge, along with the S&P 500 SPX, +4.22% and the Nasdaq Composite COMP, +3.85% indexes, just registered the worst weekly skid since the 2008 financial crisis.
“This has been and will continue to be a higher-than-normal period of volatility,” Julian Emanuel, chief equity and derivatives strategist at BTIG, told MarketWatch in a Wednesday phone interview.
Emanuel said that he had been predicting a rise in volatility because that is typical of an election year, with the 2020 presidential race coming into focus after Super Tuesday.
‘It’s emotionally and intellectually wearing to traders and investors to see moves of this level everyday.’
However, fears of the COVID-19 outbreak, which has sickened at least 92,000 people and claimed more than 3,100 lives, injected a fresh dose of uncertainty into markets.
“The virus just adds this extra layer of uncertainty that both the bond market and the commodity market were telegraphing weeks before the stock market topped,” he said.
The Dow has already registered swings of 3% or greater on five occasions so far in 2020. That is the most since 2018, which produced five such swings for the entire year, and before that there was no other year in which the Dow saw such frenzied action since 2011, which produced moves of at least 3% on nine occasions, according to FactSet data.
|Year||# of closes of the DJIA of 3% or greater|
|Source: FactSet data *active|
On a seven-day rolling average basis, the Dow’s daily percentage moves, not including Wednesday’s rally, is the largest since August 2011, according to Dow Jones Market Data.
Jim Carney, founder and CEO of alternative investment manager Parplus Partners, told MarketWatch that it isn’t just the closing changes for the equity benchmarks, but intraday moves that are also stunning.
“Now, we are moving 1% in a few minutes and 2 and 3 percent every day,” he said.
“It’s such a different animal than where we were at a couple months ago,” Carney said Wednesday.
Carney said that what’s striking is that the speed of moves has frustrated traders, and forced them to buy smaller lots of assets for fear that they couldn’t be filled. “You go to buy a hundred of something and it might move away from you in seconds,” he said.
Wednesday’s surge higher — the Dow Jones Industrial Average DJIA, +4.53% advanced 1,173.45 points, or 4.5%, the S&P 500 gained 4.2% and the Nasdaq Composite climbed 3.9% — was attributed to a number of factors, including former Vice President Biden’s strong showing during the Democratic primary contests on Tuesday night.
The win dulled the momentum of Vermont Sen. Bernie Sanders, who was seen as less favorable to business by Wall Street and a presidential front-runner until Tuesday.
Amid the changing dynamics around the presidential race and the virus, markets have felt unhinged.
Carney said that a graph of one-month realized volatility, a measure of how sharply prices change in an asset in that period, for the S&P 500 had shot up to 31.9, from an average of 11.89, a move of nearly 4 standard deviations from the norm.
So-called realized volatility is usually lower than the more popular Cboe Volatility Index VIX, -13.12%, which tracks implied volatility using S&P 500 options to measure trader expectations for volatility in the coming 30-day period.
Often referred to by its ticker symbol, the VIX was at 31.99 on Wednesday down from its recent intraday peak near 50. The VIX’s average is around 19 and the index tends to fall as stocks rise and vice versa.
All this bouncing around has made it a gut-churning experience for average and professional investors.
“It’s emotionally and intellectually wearing to traders and investors to see moves of this level everyday,” Emanuel said.
MarketWatch columnist Mark Hulbert at the end of last month noted that the VIX’s recent peak may be signaling that it is time to jump back into stocks. However, he admitted that it is eminently difficult to time an entry point.
Prior to the Great Financial Crisis, for example, the VIX’s all-time high had been 45.74. So when the VIX rose to that level in September 2008, contrarian followers of the VIX considered it to be a buy signal. As fate would have it, however, the VIX didn’t finally hit its peak until it was near 90 in late October 2008, or almost double the previous all-time high. The bear market didn’t finally come to an end until the subsequent March.
Emanuel said it may be six weeks to two months before we have a better understanding of the economic and market implications of the coronavirus outbreak that compelled the Federal Reserve to cut interest rates by half of a percentage point on Tuesday to a 1%-1.25% range, its first emergency rate cut since the 2008 financial crisis.
Some experts say that the market had been primed to selloff due to the heady level of stocks and possibility that the current economic cycle, approaching its 12th year of expansion in June and a record-setting bull market that is hoping to turn 11 on March 9, could come to an end.
The coronavirus and jitters about elections may just be a spark for volatility that may be a long time coming.
BTIG’s Emanuel said that whether the viral outbreak could lead to a recession or not remains to be seen, but on the other hand “if the virus passes without incident or minor incident, you are left with an environment where the 10-year yield is 1%,” which means that there could be a lot of upside for markets.
Either way, investors should buckle up.