This article was written by Nicholas Mitsakos : Chairman and CEO at Arcadia Capital Group.
S&P 500 stock market values are experiencing the same volatility as the first half of 2020, the start of the Covid-19 pandemic (based on the 50 largest value movements as a percentage of the index’s total market value).
Heightened volatility has grown more common across the stock market even as major indexes are approaching record highs. The volatility is not limited to specific circumstances of craziness, such as GameStop (rising more than 2,000% and then cratering), or Viacom (losing more than half its value as Achegos imploded). Apple gained $265 billion in market value during only five trading sessions in January – more than the total worth of Coca-Cola. In March, NVIDIA and PayPal each lost over $50 billion in market value in just a couple of days.
These dramatic movements show that market volatility leads to big price movements in stocks, both up and down. There are a couple of factors combining to enhance this turbulence:
- The popularity of the momentum trade (buying stocks that are rising quickly and dump the relative losers quickly).
- Decreasing liquidity (fewer buyers and sellers for the other side of trades).
Both factors magnify the market’s moves in either direction.
The trend has also impacted the options market and led investors to bet on big moves for individual stocks. Bullish options that profit if individual stocks surge have been growing costlier as investors account for the growing likelihood that shares of certain companies could abruptly jump higher as quickly as they could fall. More traditionally, investors pay more for bearish options than bullish ones (it has been costlier to protect against market crashes).
The shift among individual stocks highlights how falling volatility in the broader market, such as the S&P 500, hides these big moves in stocks.
There have also been outsize divergences among major indexes and sectors within the market. Beaten-down corners of the stock market have been outperforming their highflying growth counterparts by the largest margin since 2001. The S&P 500’s energy sector just finished its best quarter on record, after a punishing 2020. Technology stocks are now a market laggard.
These dynamics will continue, and correlations among stocks in certain market sectors will diminish. Individual winners and losers, not just the market overall, will be more characteristic. Successful investment will depend on choosing these specific companies, not just betting on the market overall.
Concerns about rising Treasury yields derailing the overall stock market, and especially impacting the technology sector, have not come to pass. The yield on the 10-year Treasury has risen to 1.72% while, during the 10-Year yield increase, the Nasdaq Composite rebounded from being down almost 10% to be off less than 3% from its high on February 12.
While it is reasonable to remain optimistic, the best strategies will look to individual investments and not overall market movements. These movements are increasingly difficult to predict, and influences, whether strong earnings, stimulus packages, or social media rants and raves, are challenging to identify let alone factor into an investment decision.