Market Monitor: A Formula for Volatility

Market Monitor: A Formula for Volatility

February 16, 2022

The formula for volatility is here to start the year with the major indexes squarely in the red through the first one and a half months.  By now you have been to the store enough times to know, everything costs more.  If you turned on the TV or read a newspaper you know the current inflation and upcoming Fed rate hikes, causing havoc on the market (if not read Michelle’s article here).  Adding to the market roller coaster are earnings season and a fluid situation with Russia and Ukraine.   

 Let’s Look at Some Highlights 

 The Stealth Bear Market 

Most of the time markets and headlines seem to exaggerate what is going on. However, when comparing recent individual holdings to the broad-based market, the markets may be painting a prettier picture than what’s actually happening. To some degree, the weighting scheme of the indexes is masking some of the actual volatility the markets are experiencing.  The S&P 500 and the Nasdaq both use market cap weighting, meaning the largest companies have a larger place in the index than smaller companies.  Apple, for example, is a chunky 6.8% of the entire S&P 500 index.  The result is that a few of the really big names in the indexes can drive a lot of the overall index performance.   

Those big names have covered up drawdowns the rest of the market has experienced over the last year.  50% of the S&P 500 companies have had at least a 20% drawdown from their highs.  The tech-heavy NASDAQ saw 76% of its members experience at least a 20% drawdown at some point over the last 52 weeks.  That means over the previous year, a large portion of individual companies hit bear market territory on their own, in what Schwab terms as a “stealth bear market.”  We bring this up to highlight that the markets have been more volatile recently,  even greater than the major indexes make it seem.   

Earnings are Impactful 

We are right in the middle of earnings season, and on the whole, they’ve looked pretty good.  With 72% of the S&P 500 companies having reported already.  On aggregate, companies are currently reporting their fourth straight quarter of growth of over 30%.  77% of companies have beat analysts’ expectations, which sounds like a lot but is pretty close to the average beat rate of the last five years.   

Individually though, some companies are experiencing wild swings based on their reports.  For example, Facebook (now known as Meta) dropped 26% after missing estimates.  Netflix tumbled over 20% in a day after falling short on new subscriber estimates.  It goes the other way too.  Snapchat rose over 58% in a day after a good earnings report.  Again, this highlights the idea that there’s more volatility right now than what we see with the broad indexes.

Ukraine Situation 

The Ukraine situation is very fluid and is adding to the market jitters.  Over the weekend, alerts popped up indicating an attack was imminent.  On Tuesday, Russia indicated that it had pulled back some troops and continues to message that they do not want war.  Of course, Russia doesn’t exactly have a reputation of being forthcoming, and anything they say needs to be taken with an unhealthy amount of grains of salt.   

The immediate impacts of a Russian invasion are likely to be to commodities.  Russia accounts for over 10% of the global oil production and supplies a significant portion of natural gas to Europe as well as producing some other commodities.  Those commodities could be sanction targets if Russia invades Ukraine, leading to even higher energy and commodity prices.   

For stocks, the picture is less clear.  History provides mixed signals to how markets would react to war.  I do believe an invasion would erode investor confidence though and would add to the existing volatility in the short term.


Through February 15th, 2022 

  • The S&P 500 index is down 6.57% YTD  
  • International stocks (MSCI EAFE Index) are down 3.57% YTD  
  • Bonds (Barclays Aggregate Bond Index) are down 4.17% YTD 
Source: Kwanti

The Smart Investor 

The volatility and wild swings amongst individual companies highlight the need for diversification.  It’s very difficult, to near impossible, to consistently predict winning companies or even sectors, especially with the quick and dramatic swings recently.  Having the right mix of investments based on your goals and risk tolerance can help dampen the impacts of these swings and help you stay on track for your long-term goals even with the current ups and downs.   

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities that represent the stock market in general. The Bloomberg Barclays US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate-term investment-grade bonds traded in the United States and is used for measuring the performance of the US bond market. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East.