Volatility has returned to financial markets, with the recent equity market drubbing leaving investors on edge.
Already at 22-year highs, US interest rates have spiked recently and fears rates will stay higher for longer have reignited recession talk. Indeed, some analysts are comparing 2023 to 1987, when stocks were in rally mode even as bond yields spiked. Worrisome bond market signals could only be ignored for so long, with stocks eventually crashing on Black Monday in October 1987.
Certainly, the recent selling has been quite intense. Last week, 93 per cent of S&P 500 stocks were trading below their 50-day moving average, one of the highest levels of the last six years. Two-thirds of stocks were technically oversold – an extreme and rare reading, notes Bespoke Investment.
Still, the uptrend is intact, with the S&P 500 above its 200-day average. Wall Street’s fear index, the Vix, has spiked but remains at historically normal levels.
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Corrective episodes are perfectly normal, and two consecutive monthly declines after a five-month winning streak is hardly indicative of a looming crash. Weakness is not only normal but “likely necessary for stocks to catch their breath before a new surge higher”, says the Carson Group’s Ryan Detrick.
Despite recent weakness, this has been a strong year for stocks, says Detrick, and strong years “tend to end strongly”.
