Reuters / Lucas Jackson
- Volatility has returned to the stock market in recent weeks, with the S&P 500 moving more than 2% for three consecutive days for the first time in 2 1/2 years.
- One historical comparison could shed light on how the benchmark equity index will fare in the coming weeks.
Volatility is back in the stock market, for better or worse.
On Monday, the benchmark S&P 500 moved more than 2% on a closing basis for a third straight day, the longest such streak in more than 2 1/2 years. What's more, Monday's surge came on the heels of two consecutive days of 2% declines, reflecting just how topsy-turvy the trading landscape has gotten.
Perhaps most notable is the degree to which investor sentiment shifted over the weekend. After spending last Thursday and Friday pulling their hair out over an escalating global war - culminating in the S&P 500's worst week in more than two years - traders softened their outlook on Monday, allowing them to swoop in and buy more stock at discounted prices.
It marks a sudden shift for US stocks, which saw measures of price swings sit locked near record lows for most of 2017. As such, the Cboe Volatility Index (VIX) has traded at an average price of 17.08 so far in 2018, a 54% increase over 11.10 last year.
Most traders will tell you they prefer volatile conditions, because of the opportunities often created by large, idiosyncratic moves. However, those chances can be largely for naught if the market doesn't move in the right direction.
To get an idea of which path US stocks might take in the wake of newfound turbulence, it's perhaps a worthwhile exercise to look at August 2015 - the last time the market saw three straight 2% moves.
Back then, the market was faced with a familiar foe: China. Still grappling with a surprise yuan devaluation earlier in the month, the Shanghai Composite index plummeted over the two days ended August 25, dragging the rest of global indexes with it.
The S&P 500 experienced three straight days of 2% declines amid the chaos, only to see a two-day rebound where the benchmark spiked at least 2.4% during each session.
What happened in the following weeks suggests bullish traders would be wise to stay the course. The China-driven selloff proved to be a short-lived headwind, and the equity bull market charged ahead. Now more than 2 1/2 years later, it's fresh off its ninth birthday.
Such a rebound from recent lows would match the consensus full-year 2018 outlook for Wall Street strategists. The S&P 500 will finish the year roughly 13% higher than Monday's close, according to the median forecast of 24 firms surveyed by Bloomberg.
"The path of recovery is likely to mimic the August 2015 selloff," Marko Kolanovic, JPMorgan's global head of quantitative and derivatives strategy, wrote in a recent client note. "We maintain our positive near-term view on US equities."
JPMorgan