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05 Oct, Wednesday
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Bull Trader USA

In One Chart: Don’t expect stock market volatility to subside in 2022

Get ready for another year of above average stock-market volatility.

According to Nicholas Colas, co-founder of DataTrek Research, history suggests that the jump in volatility that accompanied the advent of the COVID-19 pandemic in early 2020 is likely to endure well into 2022.

“Volatility comes as a storm, and it usually takes years for it to exhaust itself,” Colas said in a Thursday note.

The Cboe Volatility Index VIX, -4.40%, a measure of expected S&P 500 SPX, +0.81% volatility over the coming 30-day period, has generally been above its long-term average of 19.5 for the last two years, Colas observed (see chart below).

DataTrek Research

It is reasonable to believe that U.S. equity volatility will on average be lower in 2022 than 2020, when the VIX had a daily average of 26.2, he said, and will likely come in much like 2021, which has seen a daily average of 19.7. But as the chart shows, volatility can run 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 1997 Asia Crisis through the dot-com bubble of 2000, 9/11 and Iraq War from 2003 saw the VIX remain over 19.5 for the better part of seven years. And the global financial crisis of 2008 and the subsequent eurozone debt crisis of 2010-2014 kept U.S. equity volatility elevated for five years.

That said, the “bear case” for volatility, which is therefore bullish for stocks, rests with corporate-earnings power, Colas said, reiterating that DataTrek expects Wall Street’s 2022 estimates to prove too low, with upside earnings surprises likely to keep equity prices stable or rising. The bull case for volatility, which would be bearish for stocks, rests with the uncertainties around economic growth and the Federal Reserve’s interest rate policy as it addresses inflation, he said.

Major stock indexes are on track for strong gains in 2021 despite historically elevated volatility. The Dow Jones Industrial Average DJIA, +0.77% is up 17.6% for the year to date, while the S&P 500 has advanced 26% and the Nasdaq Composite COMP, +0.96% is up 21.7%.

“We expect 2022 to look a lot like 2021 in terms of market churn because, well, the investment issues are largely the same: Pandemic concerns, inflation, etc.,” Colas wrote. “U.S. equities can do well in that environment; 2021 shows that. We just need corporate earnings to come through, and we remain confident they will.”

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