Saqib Ahmed Iqbal

NEW YORK, (Reuters) – A dramatic two-day swing of U.S. stocks highlights a pattern that market participants think will continue for many months: extreme volatility.

The dropped 3.6% on Thursday, a day after racing 3.0% higher on the Federal Reserve’s monetary policy statement. The index saw two major one-day declines in the past five sessions. This is the largest drop since pandemic that ravaged markets 2 years ago. It has now fallen 13% to date in 2022. The Nasdaq fell 5%.

By one measure – the 10-day realized volatility for the S&P 500, or how much the index has moved over a rolling 10-day period – U.S. stocks are at their choppiest since the pandemic driven selloff in the first half of 2020.

GRAPHIC: Choppy times https://graphics.reuters.com/USA-STOCKS/zgvomleazvd/chart.png

Investors are confronted with a variety of potential combustible issues, including whether or not the Federal Reserve can manage surging inflation and avoid causing the economy to fall into recession.

Wednesday’s rally came after Fed Chair Jerome Powell announced a widely expected 50 basis point interest rate increase and said policymakers were not discussing larger hikes. He also expressed confidence that the central bank could steer the economy to a so-called soft landing – a view that investors seemed far more skeptical of a day later, as equities tanked.

Matthew Tym of Cantor Fitzgerald’s equity derivatives trading department stated, “There is a lot more uncertainty about what is happening, with inflation and oil, global macroeconomics events, etc.” “I believe there will be volatility for the next year, most likely for the full year,” Tym said.

The sharp selloff sent the Cboe Volatility Index, known as Wall Street’s fear gauge, up 5.78 points to 31.20, far above its long-term median of 17.63. Tym said he believed it was unlikely the index would trade “a whole lot lower” anytime soon.

Thursday’s selloff was extraordinarily broad with every S&P sector down on the day and more than 95% of the index constituents in the red.

Chris Murphy of Susquehanna’s International Group, who is co-head of the derivative strategy department said: “It’s an obvious ‘get outside now and answer questions later’ type of thing.”

Murphy stated that today’s action is a clear indication of the Fed’s inability to talk out of its current situation. He said Murphy was going to need to be tough to correct this problem.

Stocks fell as 10-year benchmark bond yields rose to above 3%. Higher yields can dull the allure of stocks, particularly those in high-growth sectors such as technology, whose companies’ cash flows are more weighted in the future and diminished when discounted at higher interest rates.

“The bond market had started to factor in inflation and central bank policy earlier and maybe more effectively than the equity market,” said Brooks Ritchey, co-chief investment officer at K2 Advisors, pointing to macro hedge funds as those playing this theme. The equity market may require more time and/or more pressure to position itself for the new interest-rate cycle.

Andrew Brenner, National Alliance Securities head of international fixed-income, saw Thursday’s sells as funds that are following macro trends.

Brenner said that it was “pretty awful” in equity markets. He stated that Powell’s remarks prompted selling because investors considered Powell to be more behind the curve in raising rates.

Markets are not the only ones concerned by Fed. The war in Ukraine has repercussions on oil prices and other commodities, which have remained high. The inflation issue is still a major concern for markets. Key U.S. consumer prices data will be released next week.

Jeff Klingelhofer from Thornburg Investment Management said in a note that “Volatility is taking the wheel”, so investors need to be careful as the market adjusts.