What Causes Market Volatility?

Chart of the Week: A More Manic Mr. Market

May 31, 2022

If the stock market seems more volatile this year, that’s because it is. Since its 1957 inception, the S&P 500 index has typically moved about 0.7% up or down on any given day. So far this year, the S&P’s average daily move has been 1.2%. What’s causing this market volatility?

If 2022 ended today, it would clock in as the index’s fifth most volatile year ever, behind 2002, 2008, 2009 and 2020.

Look at those years again. In the S&P 500’s 55-year history, the five most volatile years have all fallen in the last two decades. Volatility hasn’t suddenly spiked higher, though. Instead, it has been trending higher for decades.

What Causes Market Volatility?

My best guess is that this higher volatility is an unintended consequence of improved technology and lower trading costs. Decades ago, trading was onerous—it was done over the phone, trading commissions were high and bid-ask spreads were wide. In 2022, anyone with a smartphone can trade with a tap on the screen at nearly zero cost. Is it any wonder that people are trading more frequently, and markets are moving more dramatically?

To be clear, a more volatile market is not a less investable market. Yes, big daily swings create noise and risk, throwing long-term investors off course, temporarily. Our job is to rise above the noise and look at volatility as an opportunity—when prices move above or below their estimated values, it represents a chance to sell at a profit or buy at a bargain (or to realize losses to lower tax bills).

What causes market volatility? Our Chart of the Week shows it on the rise.
Note: Chart shows average daily absolute percentage change in S&P 500 index level by calendar year from 1958 through May 2022 along with the linear average trendline over the period. Sources: S&P Dow Jones Indices, Adviser Investments.

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