Prepare for another year of above-average market volatility.
According to Nicholas Colas, co-founder of DataTrek Research, history suggests that the surge in volatility that accompanied the onset of the COVID-19 pandemic in early 2020 is likely to last until 2022.
“Volatility comes like a storm, and it usually takes years for it to wear off,” Colas said in a note Thursday.
The Cboe VIX volatility index,
a measure of the expected S&P 500 SPX,
volatility over the next 30 days, was overall higher than its long-term average of 19.5 over the last two years, observes Colas (see graph below).
It’s reasonable to believe that volatility in U.S. stocks will on average be lower in 2022 than in 2020, when the VIX had a daily average of 26.2, he said, and that it will likely happen a bit. as 2021, which saw a daily average of 19.7. But as the chart shows, volatility can be above or below average for years, he noted.
He observed that the first Gulf War in 1991 caused a spike in volatility that lasted only 18 months, while the period from the Asian crisis of 1997 to the dot-com bubble of 2000, September 11 and the Iraq War of 2003 saw the VIX remain over. 19.5 for almost seven years. And the global financial crisis of 2008 and the ensuing eurozone debt crisis from 2010 to 2014 kept volatility in US stocks high for five years.
That said, the “bearish case” of volatility, which is therefore bullish for stocks, rests on the power of corporate earnings, Colas said, reiterating that DataTrek expects Wall Street estimates for 2022s. ‘prove too weak, with upside surprises likely to keep stock prices going. stable or increasing. The bullish argument for volatility, which would be bearish for equities, hinges on uncertainties surrounding economic growth and the Federal Reserve’s interest rate policy as part of the fight against inflation, a- he declared.
Major stock indices are on track for solid gains in 2021 despite historically high volatility. The Dow Jones Industrial Average DJIA,
is up 17.6% for the year to date, while the S&P 500 is up 26% and the Nasdaq Composite COMP,
is up 21.7%.
“We expect 2022 to look a lot like 2021 in terms of churn rates because, well, the investment issues are largely the same: pandemic issues, inflation, etc.,” Colas wrote. “US stocks can do well in this environment; 2021 shows it. We just need the corporate profits to come out, and we remain convinced that they will. “