As most ASX investors would be painfully aware of, the past few months have seen share market volatility spike to levels we haven't seen since the initial COVID-induced crash of 2020.
As of today's pricing, the S&P/ASX 200 Index (ASX: XJO) remains down by close to 5% over 2022 thus far, and hasn't gone anywhere since June last year. Yes, the ASX 200 has traded sideways for roughly 8 months.
Not that we haven't seen some dramatic moves in that time though. To illustrate, here is a graph of the S&P/ASX 200 VIX Index, which measures market volatility, over the past 12 months:
So as you can see, volatility has indeed been on the rise over the past few months. Many investors link this rise in volatility to a number of factors, including the Russia-Ukraine Crisis, higher inflation, and the prospect of higher interest rates, and oil prices.
Image source: Getty Images
Is ASX 200 share market volatility here to stay?
No one really likes volatility and the large fluctuations it inflicts upon our share portfolios. So is this something ASX investors will just have to live with now? Is volatility here to stay?
Writing for Livewire, Chief Investment Officer at Jamieson Coote Bonds, Charlie Jamieson, argues it is.
Jamieson points to the actions of central banks around the world in recent years. These banks responded to the initial outbreak of the pandemic by pumping unprecedented amounts of liquidity into financial markets around the world. We saw that in the United States, as well as here in Australia. Indeed, our own Reserve Bank of Australia (RBA) initiated a quantitative easing (QE) program for the first time in our history in 2020.
But what goes up must come down, and central banks around the world are today working to unwind much of this stimulus. New Zealand and the United Kingdom have already started hiking interest rates. And most commentators are expecting the RBA and the US Federal Reserve to follow suit very soon.
Are central banks fuelling a wild market?
So, we had large levels of capital enter the global financial system, which is still "sloshing around", according to Jamieson. It's the ongoing withdrawal of this stimulus that has Jamieson convinced volatility is here to stay:
But I think that the one thing that we've got to remember is that interest rates are the locomotive on the front of a huge train of assets. Where they go ultimately really matters…
There have been episodes in the last few months where that train right at the front has derailed… And yet a lot of the train has still been broadly travelling straight ahead. But in January, [central banks are] starting to realise that there are some twists and turns coming up.
So think about that. Clearly, if central bankers continue to deliver aggressive withdrawal of accommodation, we have to expect that volatility is going to be very pronounced.
If Jamieson is to be believed, volatility is certainly here to stay. It seems we had better strap on our seatbelts if he proves to be correct.
