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More volatility. Less predictability.

S&P 500 stock market values are experiencing the same volatility as the first half of
2020, the start of the Covid-19 pandemic (based on the 50 largest value movements as a
percentage of the index’s total market value).

Heightened volatility has grown more common across the stock market even as major
indexes are approaching record highs. The volatility is not limited to specific
circumstances of craziness, such as GameStop (rising more than 2,000% and then
cratering), or Viacom (losing more than half its value as Achegos imploded). Apple
gained $265 billion in market value during only five trading sessions in January – more
than the total worth of Coca-Cola. In March, NVIDIA and PayPal each lost over $50
billion in market value in just a couple of days.

These dramatic movements show that market volatility leads to big price movements in
stocks, both up and down. There are a couple of factors combining to enhance this

  1. The popularity of the momentum trade (buying stocks that are rising quickly and
    dump the relative losers quickly).
  2. Decreasing liquidity (fewer buyers and sellers for the other side of trades).

Both factors magnify the market’s moves in either direction.

The trend has also impacted the options market and led investors to bet on big moves for

individual stocks. Bullish options that profit if individual stocks surge have been growing
costlier as investors account for the growing likelihood that shares of certain companies
could abruptly jump higher as quickly as they could fall. More traditionally, investors pay
more for bearish options than bullish ones (it has been costlier to protect against market

The shift among individual stocks highlights how falling volatility in the broader market,
such as the S&P 500, hides these big moves in stocks.

There have also been outsize divergences among major indexes and sectors within the
market. Beaten-down corners of the stock market have been outperforming their
highflying growth counterparts by the largest margin since 2001. The S&P 500’s energy
sector just finished its best quarter on record, after a punishing 2020. Technology stocks
are now a market laggard.

These dynamics will continue, and correlations among stocks in certain market sectors
will diminish. Individual winners and losers, not just the market overall, will be more
characteristic. Successful investment will depend on choosing these specific companies,
not just betting on the market overall.