NEW YORK (Reuters) – A massive two-day swing in U.S. stocks highlights a trend that some market participants believe will be a feature of the months ahead: intense volatility.
The S&P 500 index fell 3.6% on Thursday, a day after rising 3.0% on the Federal Reserve’s monetary policy statement. Over the past five sessions, the index has recorded two of its biggest one-day declines since the pandemic rocked markets two years ago, leaving the benchmark down 13% so far. in 2022. The Nasdaq fell 5%.
By one measure – the 10-day realized volatility for the S&P 500, or the index’s change over a rolling 10-day period – US stocks are the choppiest since the pandemic-driven selloff in the first half of 2020 .
GRAPHIC: choppy times https://graphics.reuters.com/USA-STOCKS/zgvomleazvd/chart.png
The swings come as investors grapple with an array of potentially combustible factors, chief among which is whether the Federal Reserve will be able to rein in soaring inflation without dragging the economy into recession.
Wednesday’s rally came after Fed Chairman Jerome Powell announced a widely expected 50 basis point interest rate hike and said policymakers were not considering bigger hikes. He also expressed confidence that the central bank could steer the economy into a so-called soft landing – a view investors seemed far more skeptical of a day later as stocks tumbled.
“There’s a lot of uncertainty with what’s going on, with inflation, oil, global macro events,” said Matthew Tym, head of equity derivatives trading at Cantor Fitzgerald. “I think we’re going to have some volatility going forward, probably for the whole year.”
The selloff sent the Cboe Volatility Index, known as Wall Street’s fear gauge, up 5.78 points to 31.20, well above its long-term median of 17.63. Tym said he thought the index was unlikely to trade “much lower” anytime soon.
Thursday’s selloff was extraordinarily wide with all S&P sectors down on the day and over 95% of index constituents in the red.
“It’s a clear ‘get out now and ask questions later’ kind of thing,” said Chris Murphy, co-head of derivative strategy at Susquehanna International Group.
“Today’s decision tells you the Fed can’t get away with it, you’re going to have to work hard to fix this,” Murphy said.
The sell-off in equities came as benchmark 10-year bond yields rallied above 3%. Higher yields can tarnish the attractiveness of equities, especially those in high-growth sectors such as technology, whose corporate cash flows are more weighted to the future and decline when discounted at interest rates. higher interest.
“The bond market started pricing in inflation and central bank policy earlier and perhaps more effectively than the equity market,” said Brooks Ritchey, co-chief investment officer at K2 Advisors, pointing to macro hedge funds like those playing this theme. “So we may need a little more time or even a little more pressure for the equity market to position itself for the new interest rate cycle.”
Andrew Brenner, head of international fixed income at National Alliance Securities, viewed Thursday’s sellers as funds that follow macro trends.
“It’s pretty awful in the stock markets,” Brenner said, saying the selloff was a response to Powell’s remarks as investors viewed him even further “behind the curve” in the rate hike.
The Fed is not the markets’ only concern. Prices for oil and many other commodities remain exorbitant, in part due to the fallout from the war in Ukraine. Markets remain focused on inflation, with key US consumer price data to come next week.
“Volatility has taken over, so investors should buckle up as the market adjusts to new conditions,” Jeff Klingelhofer, co-chief investment officer at Thornburg Investment Management, said in a note.
(Reporting by Saqib Iqbal Ahmed; additional reporting by Carolina Mandl; editing by Ira Iosebashvili, Megan Davies and Leslie Adler)
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