Some crack reporting below…
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Investors shouldn’t expect a bull market to return for stocks until volatility declines, according to a Thursday note from DataTrek Research.
Unfortunately, investors shouldn’t expect volatility to decline until two things happen: The Federal Reserve stops hiking interest rates, and there’s more clarity on corporate earnings expectations heading into a potential recession next year.
If investors can properly gauge those two factors, and ultimately anticipate the transition from a high volatility regime to a low volatility one, then they can capitalize off extreme stock market returns.
Prior examples of market transitions include the S&P 500’s 28% surge in 2003 after the dot-com bubble, the 26% gain in 2009 after the Great Financial Crisis, and the 61% gain from the COVID-19 low through the end of 2020.
“For volatility to structurally decline and drive those high returns, investors need to have growing confidence they know how corporate earnings will develop. This means they mush have a handle on monetary/fiscal policy,” DataTrek co-founder Nicholas Colas said.
And right now, investors are unsure about both factors. The Fed caught the market by surprise last week when it indicated that it will likely raise interest rates by another 75 basis points in 2023 and leave rates higher for longer. And the Fed’s timeline could change on a dime if inflation remains persistently high.
