Earnings Exacerbate Stock Market Volatility Whipped Up by Fed

(Bloomberg) -- Wild swings have been a hallmark of the U.S. stock market all year. It’s only gotten worse during the latest earnings period.

Stocks rallied as much as 3% Thursday on the back of strong results from technology heavyweights. Meta Platforms Inc. surged 18%, while PayPal Holdings Inc. and Qualcomm Inc. each jumped more than 10% just two days after gloomy outlooks led to the biggest market selloff in seven weeks. In late trading Amazon.com Inc. plunged 10% and Intel Corp. lost 5% after disappointing forecasts.

The outsize swings continued a stretch that’s seen the average S&P 500 stock move 4.2% in either direction after reporting earnings this quarter, the most since the last period of 2011, according to data from Goldman Sachs Group Inc. That compares with an average price change of 3.4% in the prior 65 quarters.

Heightened volatility has gripped markets since mid-January, when the Federal Reserve’s intentions to aggressively fight inflation became apparent. The central bank’s first rate hike in three years sent Treasuries into a tailspin and dented the appeal of the stock market’s biggest companies. War in Ukraine, renewed Covid lockdowns in China and the lingering threat of recession add to the market headwinds, making it a risky prospect to see any rebound as the end of the turbulence.

“The tech titans covered up a lot of stomach churning, but now a confluence of events has ripped that cover off, and investors are feeling the choppiness across the board,” said Mike Bailey, director of research at FBB Capital Partners. “Inflation has been like an unwelcome house guest, while the hawkish Fed pivot is hitting risk assets indiscriminately. Then the bottom dropped out with geopolitical uncertainty, hitting companies across the board.”

For a sense of how stomach-churning things have been, consider this: The Nasdaq’s average daily move over the last 100 trading days reached close to 1.6%, the highest such reading since the early days of the pandemic, according to Bespoke Investment Group. There have only been four other periods that averaged such daily volatility -- besides the pandemic, they include the dot-com bust, the 2008 crisis and 2011. 

“Volatility like we have seen in the last four months doesn’t come around very often,” Bespoke strategists wrote in a note.

So far, the swings have left U.S. stocks sharply lower for the year. The S&P 500 is down roughly 10% since the start of the year, while the Nasdaq 100 has slipped about 20% from its November all-time high. 

Keith Lerner, co-chief investment officer and chief market strategist at Truist Advisory Services, says that concerns around the more aggressive Fed, as well as lockdowns in China, have been some of the culprits behind the market’s recent choppiness. But, he sees some silver linings: economic growth will slow but he doesn’t predict a recession in the near term. Plus, sentiment is low, which is a constructive signal, he says. 

“Perhaps the biggest asset for the market from a contrarian standpoint is current depressed sentiment,” Lerner wrote in a note. “Indeed, the hurdle rate for positive surprises is low.”

Still, Anastasia Amoroso, chief investment strategist at iCapital, says investors have gotten into the habit of fading any positive news, “and we really need more positive catalysts to sustain this rally.”

“The main reason for lack of conviction here is that we can’t really point to any positive catalysts in the foreseeable future,” she said in an interview. “Until and unless we get a turnaround in growth expectations and a pullback in inflation -- and therefore Fed expectations -- it’s really hard to pinpoint any positive catalyst that would cause a more sustainable rally. “

©2022 Bloomberg L.P.