Down one day, up the next, the stock market is making life miserable for anyone in search of a coherent narrative to explain its moves.
That’s three times as great as any December since the Christmas rout of 2018 and almost twice the average move of the last year.
While many forces are at play — witness all the evidence of the fast-spreading omicron variant on Friday — it’s hard not to notice volatility is picking up at a time when the promise of unending central bank liquidity is in jeopardy.
Big reversals played out over the week as investors tried to get a grip on whether Fed Chair Jerome Powell will be able to engineer a soft landing by taming inflation without choking off growth.
The Nasdaq 100 surged 2.4% on Wednesday when the Fed announced a faster end to its program of economic stimulus and signaled two rate hikes next year, only to wipe out the entire gain the next session.
While strategists at Credit Suisse Group AG point to history and say it’s safe to buy stocks during the initial stage of a tightening cycle, their counterparts at Bank of America Corp.
“They look at the world and they have a view, but it’s not a powerful view.
In speculative corners of the market, the ride has become bumpier.
Such a wide divergence reflects “a historically unprecedented overshoot” in selling smaller and more volatile stocks — economically sensitive shares in particular — that was mostly driven by hedge funds stepping up bearish bets while cutting back on their risk exposure, according to JPMorgan Chase & Co.
All the bearishness likely sets the stage for a rebound into the new year, when the pandemic comes to an end and the economy keeps expanding, Kolanovic says.
Over the week, a MSCI measure of defensive shares such as utilities and consumer staples climbed 1.2%, compared with a loss of 2.9% for cyclical shares.
“If you’re a believer we’re late in the cycle, you will probably err more towards the side of the Fed making a policy error, or tightening potentially too much,” she said in an interview on Bloomberg TV with Lisa Abramowicz.