This is what typically happens to stocks after periods of high volatility
The stock market can be a rollercoaster of emotions for investors, especially during periods of extreme volatility. However, history has shown that these turbulent times are often followed by strong stock returns, making it important for investors to stay the course and even consider buying more stocks.
The VIX index, also known as the Wall Street fear gauge, measures expected volatility in the S&P 500 stock index. When the VIX spikes above 40, indicating significant volatility, the S&P 500 has historically been up 30% on average a year later. Additionally, the odds of positive stock returns 12 months later during these periods are above 90%.
Edward Lee, a Wells Fargo investment strategy analyst, emphasized that volatility creates opportunities for investors. While it’s normal to feel concerned during volatile times, history has shown that higher volatility often leads to higher returns. Volatility tends to coincide with market drawdowns and investor panic, both of which can set the stage for successful investing in the following 12 months.
In early April, stock volatility spiked after President Donald Trump announced unexpectedly high country-specific tariffs, causing the S&P 500 to sell off nearly 11% in just two days. The VIX reached around 53, marking one of the top 1% closes in its history. However, low expectations can often result in relief rallies, where investors re-enter the market as the initial news is not as dire as anticipated.
Callie Cox, chief market strategist at Ritholtz Wealth Management, noted that since 1990, about half of the S&P 500’s significant selloffs ended within a week of the VIX’s highest close, with some even ending on the same day. These selloffs typically follow a “V-shaped” pattern, characterized by a sharp downturn followed by a quick rebound.
While history can provide valuable insights, Cox cautioned that the current market landscape may be different due to ongoing uncertainties surrounding trade policy. She advised long-term investors to consider buying at this time, but also warned that the bottom of the selloff may not have been reached yet.
In conclusion, periods of stock market volatility can be unsettling, but they also present opportunities for investors to capitalize on potential returns. By staying informed, maintaining a long-term perspective, and being prepared for market fluctuations, investors can navigate volatile periods with confidence and potentially reap the benefits in the future.
