Home » Market Volatility: Here’s What You Need to Know

Market Volatility: Here’s What You Need to Know

by Nathan Zachary

Stock market volatility gauges how much the entire value of the market rises and falls. This also holds true for certain stocks or bonds, whose fundamental pricing may change. Measuring how much an asset’s price deviates from its average price over time is the most used method for calculating volatility. The statistical metric that is most often used to describe volatility is standard deviation.

What causes the market’s turbulence?

When unpredictable events occur on the outside, stock markets can turn erratic. The S&P/TSX Composite Index and other major stock indices often fluctuate no more than 1% in a single day. However, during the COVID-19 pandemic’s early days in 2020, similar indices often fluctuated by more than 3% every day. Recently, during Russia’s invasion of Ukraine and the ensuing conflict, a similar event took place. Investors don’t know what will happen when such external events occur, and the uncertainty might cause irrational purchasing and selling.

Market volatility is sometimes ascribed to events like economic reports, corporate news, renowned stock experts’ predictions, or surprise earnings outcomes. Some market observers also attribute volatility to high-frequency trading companies, short sellers, and day traders.

Are market reversals typical?

Yes. Downturns in the stock market are common and, as was already said, may be brought on by a variety of circumstances. Anyone with access to the internet may checkup historical data on the duration of crashes, corrections, and bear markets. (A stock market collapse is an abrupt, rapid decline in stock values. Generally speaking, a “correction” is when the price of an asset decreases by more than 10% from its most recent high. This also holds true for the whole stock market. Typically, a bear market occurs when stock values decline by 20% or more from previous high. Nobody is aware of the timing, characteristics, or size of these market downturns, however.

How soon will the stock market recover?

There is no simple answer; nobody is aware. You could definitely earn a lot of money if you did. Investors will, of course, keep an eye out for certain factors that might provide indicators of the market’s direction. If central banks throughout the globe increase interest rates, it will be a hot topic. Indications of such actions may appear in economic data or in remarks made by central bank employees. Retail sales and activity in the housing industry, such as new starts and existing house sales, are other economic indicators that investors keep an eye on. It’s crucial to bear in mind that stock markets don’t always decline; history tells us this.

Why is inflation so high, and what does it entail?

The rate of increase in prices for goods and services is measured by inflation. Prices are influenced by a variety of variables, such as how difficult it is to locate a product, the cost of labor and raw materials, and rivalry between firms that provide products and services. Policies that promote economic expansion may also lead to inflation. For instance, when individuals have more money, they often purchase more products, which leads to more demand and higher pricing.

As of April 2022, Canada’s inflation rate was 6.8%, which is a three-decade high. High inflation is being caused by a number of variables, including ongoing supply chain disruptions and the Russia-Ukraine conflict, which has increased the cost of commodities including food, fuel, and natural gas. [8] People are also spending money they stored up during times of lockdown on items like vacation when COVID-19 public-health restrictions loosen. Once again, the increasing demand is causing prices to rise sharply.

Why are interest rates rising? What are interest rates?

Indicated by an interest rate, the price of borrowing money. Additionally, it pays those who supply the service of lending money and assume the associated risk. Interest rates stimulate lending, borrowing, and spending, which keeps an economy humming. However, interest rates fluctuate often and vary across loans. It’s critical that you comprehend the causes of these modifications and variances regardless of whether you’re a lender, borrower, or both.

For the first time in decades, the Bank of Canada increased its policy interest rate by half a percentage point in April. This was done to curb inflationary excess. The rate increase raises the Bank’s policy interest rate, or overnight rate, from 1.0% to 1.5 percent. People and companies must pay more interest on loans and mortgages when the Bank increases its overnight rate. This deters individuals from taking on debt, lowers their total expenditure, and often lowers inflation.

Remain calm and keep everything in perspective.

Even seasoned investors might get nervous when the market fluctuates. But investment involves some risk.

ICMAGroup noted that although market dips may be unsettling and frightening, historically equities have a propensity to bounce back and provide investors favorable long-term returns. Following a severe decline during the global financial crisis of 2008 and 2009, Canadian equities gradually rebounded. When China depreciated its currency in the second half of 2015, as well as again in early 2016 in reaction to a time of declining oil prices, U.S. equities markets south of the border saw significant declines. As they did in the months leading up to the 2016 U.S. presidential election that Donald Trump finally won, U.S. equities plummeted once again after the Brexit result. Again in 2018, worries about trade between the U.S. and China alarmed investors and caused a decline in American equities. Nevertheless, the market saw an overall increase of more than 30% throughout these three years.

Using market timing

Investors are advised to “time the market over time in the market,” according to an aphorism. This implies that rather than attempting to predict when the market will rise and fall, you make regular investments (more on this later) and rely on the stock market to increase over the long run. According to studies, when investors decide to purchase and sell, their assets do less well than if they had just acquired and retained the same money.

Final words

While markets are in a downturn, there are steps you can do on your own or with your adviser to improve your long-term position. For instance, if you are seeking to sell stocks, a downturn can provide a chance for tax-loss harvesting or selling investments at a loss. This can lead to paying lesser taxes in the near term, depending on the tax jurisdiction you are in. Consider reviewing your portfolio’s asset mix as well. You may be able to rebalance your portfolio by taking advantage of certain assets’ reduced pricing.

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