The Calm Before The Storm: Why Volatility Is Set To Surge

The accompanying chart illustrates that when the returns of the S&P 500 outperform the equally weighted S&P 500 by 15% or more unpleasant events tend to occur, often involving the appearance of a recession.

We are near, or at, such a juncture now. Even more disturbing is that the current period of outperformance by the S&P 500 has been driven by a historically small number of mega-cap stocks, mainly the “magnificent 7.” With these stocks representing an over 30% weighting in the S&P 500 a market decline, if history repeats, could be significantly more severe than in previous instances.

The months and years ahead are expected to feature unusual market volatility. The chart and recent market price action suggests that the period of calm enjoyed by markets is nearingan end. There is no shortage of potential economic and geopolitical catalysts for a spike in volatility.

The anticipated volatility will be jarring for many investors, especially after the level of investor complacency demonstrated thus far in 2024. However, with the associated risks will inevitably come attractive risk/reward opportunities to profit across markets and asset classes.

Investors should be attentive to signs of a trend change in markets and practice sound risk management techniques to preserve the bulk of accrued profits. The remainder of 2024 is likely to see a substantial change in market dynamics, with alert investors being prepared to seize profit opportunities.

As always, we’ll be sharing our analysis of unfolding events and investing activities each month in the Global Investment letter. If you found this post insightful, imagine the value you’ll get out of the full letter. Subscribe now to our free weekly investment comment (exclusive to those who signup) and gain access to free sample issues of the Global Investment Letter.

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