WHAT'S NORMAL?

The US stock market has totally lost its chill

On the move.
On the move.
Image: Reuters/Andrew Kelly
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2017 was the markets’ least volatile year in decades. They remained eerily calm through natural disasters, political instability, and even the possibility of a nuclear crisis. But the lower the Cboe volatility (VIX) index—which acts as the market’s “fear gauge”—fell, the more investors worried that a nasty correction was looming.

Indeed, in the first quarter of 2018, investors got a brutal reminder of how fitful the stock market can be.

The VIX index, which measures expected volatility implied by the price of stock options for the S&P 500 and is used as a gauge of risk, jumped 81% this quarter. It’s the biggest move since the third quarter of 2011.

The exuberance of the corporate tax cuts in late 2017, promises of big fiscal spending plans by the Trump administration, and even strong economic growth weren’t enough to keep the markets calm. The market went from celebrating its best year since 2013 to a correction in just a matter of weeks.

Why so spooked? Hints of quickening inflation and higher interest rates were factors, which meant that the new Federal Reserve chairman received an unfriendly welcome on his first day on the job. Meanwhile, investors reacted badly to the resignation of Donald Trump’s chief economic advisor, Gary Cohn, and Trump’s tariffs sparked fears of a trade war.

The S&P 500 index issued its first quarterly loss since late 2015.

Already this year, the S&P 500 has gained or lost 1% in a single day 23 times, by far the most in a year and a half, according to Bloomberg calculations.

It’s worth remembering, however, that the stock market isn’t a reliable measure of the health of the economy. While stocks certainly benefit from a stronger economy that improves the earnings outlook of companies, the relationship between the two is complex. Additionally, many Americans don’t own stocks, especially poorer Americans, and so don’t directly benefit (or suffer) from such swings. In fact, this year the good news of rising wages for workers was among the factors behind a market dive.

Stock markets have also suffered as a result of their own success, or at least the expectation of their success. The price-to-earnings ratio, a measure of valuation, is the highest it’s been outside of the dot-com bubble. Traders have made stocks expensive, as they’ve pushed up the price of stocks based on assumptions about future earnings. High valuations make many investors wonder how long this ride can last.

This has been evident particularly in technology stocks, which have long been the market’s darlings. Now their valuations are so much higher than other stocks that investors worry they are vulnerable to a sharp correction. A series of bad events, including Facebook’s data privacy scandal, Tesla’s fatal car crash, and Trump’s criticisms of Amazon, is undoing the gains in so-called FAANG stocks. On Tuesday (March 27), the NYSE’s FANG+ index, which includes Facebook, Apple, Amazon, Netflix Google, Tesla, Twitter, Alibaba, Baidu, and Nvidia, fell 5.6%—its biggest one-day drop since at least September 2014—and dragged down the overall market.

It could be argued that the markets’ jittery nerves are unwarranted. After all, interest rates are supposed to go up as well as down, and stock prices are supposed to go down as well as up. But years of low volatility, low interest rates, and a steady bull market in equities made that easy to forget.

Meanwhile, the first quarter saw bitcoin—a favorite trade of 2017—blow up. After rising 1,000% last year, the most popular cryptocurrency has almost halved its price this quarter. Volatility is everywhere.