More volatile times for the sharemarket?

CommSec CommSec

 

8 Oct 2021

Sharemarket volatility
  • Over the long term, the benchmark S&P/ASX 200 index has risen by around 0.6 per cent a month. But that broader uptrend hides a raft of small ‘up’ and ‘down’ movements that occur in the index on a daily basis. 
  • Daily moves in the index of 1 per cent or more are relatively rare – up and down – so this metric is one of the best ways to quickly gauge market volatility. An increase in volatility generally reflects a lift in the number of newsworthy events. 
  • As would be expected, traders love volatility – there is great scope to make money. Investors are less endeared to volatility, so a lift in the number of big daily moves on the market tends to send investors to the sidelines.
  • So where do we stand currently? Over the year to September there were only 47 ‘high volatility’ days – the lowest result in 19 months and below the long-term average of 60 daily moves a year, or 5 moves a month.
  • In September there were 5 high volatility days for the Aussie sharemarket, the most in four months and after notching up just 1 ‘high-vol’ day in both July and August. In fact, in the last eight trading days there have been 5 ‘high-vol’ days. Understandably that reflects the daily news flow which has had almost everything.

 

Consider:
  • Oil prices near 7-year highs
  • Inflation fears
  • Winding back of stimulus by global central banks
  • Sector rotation in the US in response to reopening economies
  • The European energy crisis
  • The Chinese energy crisis
  • The Chinese property crisis  
  • Risk of US government shutdown
  • The debt ceiling debate in the US
  • Potential for reopening of the NSW economy
  • Falling iron ore prices
  • Supply chain disruptions and labour shortages
 
  • Now while it’s not hard to line up the news flow with sharemarket volatility, actually trying to predict whether the volatility will continue is more difficult. 
  • As we’ve seen, the government shutdown was averted in the US. However policymakers have only kicked the can down the road – agreement on budget measures is still required by December. 
  • Again, it appears the same result will occur with the US debt ceiling – we’ll all be back in December to see whether the ceiling will be lifted or scrapped.
  • The energy crises can be dealt with by greater gas production. And indeed Russia is offering to lift output and export more gas to Western Europe. 
  • And if oil prices stay high or lift further, there will be pressure on the OPEC+ group to lift production.
  • The Chinese property crisis may linger a little longer, as there are more fundamental imbalances. But it depends on how quickly and effectively the ‘bad’ property groups can be ring-fenced from the ‘good’ groups. And also how effectively the ‘bad’ companies can be ring-fenced to prevent spill-over effects to the broader economy
  • Reopening of economies is a theme that will continue to play out for a number of months. The things to watch are vaccination rates as well as any signs of new variants emerging. 
  • There was a spike in the S&P/ASX Volatility index (VIX) during the initial Covid-19 outbreak in March 2020. In March there were also 19 ‘high vol’ days – a record for the series back to 1994.
  • Overall though – and up to the last fortnight – it’s important to know that sharemarket volatility has been historically low. That low volatility coincided with 11 straight months of sharemarket gains through to August – the longest winning streak in almost 80 years.   

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Market Volatility

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This site is directed and available to and for the benefit of Australian residents only. © Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 ("CommSec") is a wholly owned, but non guaranteed, subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and both entities are incorporated in Australia with limited liability.

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