Stock market volatility is the movement or swing in stock prices. Volatility can make investors anxious as stock prices rise and fall, especially when markets experience a pullback. In the last six months there have been several spikes in volatility, but the spikes are normal. Volatility is not unusual and there are always fluctuations in the stock market, however, heightened volatility can cause investors to feel uncertain about their investments and therefore it is more challenging to remain invested.
Volatility can be measured in a few different ways, such as the CBOE Volatility Index (VIX), standard deviation, Bollinger Bands, and beta. One of the most common is the VIX. The VIX is a measure of expected price fluctuations in the S&P 500 Index options over the next 30 days and often referred to as the “fear index.” When prices are expected to change more rapidly, the VIX will be higher and when prices are expected to be relatively steady, the VIX will be lower.
There are several factors that can drive volatility in the stock market and a few of them are below:
- Economic data: gross domestic product (GDP), inflation, employment figures
- Corporate earnings
- Investor sentiment
- News events: Fed policy changes, tariff policies, DeepSeek
Over the last six months there have been several spikes in volatility due to changes in expectations in future Fed policy (less cuts), the yen carry trade unwind, and uncertainty around Trump’s tariff policies. The spikes are highlighted in the chart below1 (red circles). It may seem these events are causing volatility to be abnormally high with more frequent spikes, but that hasn’t been the case. The current VIX is 16.5, below the average for the last three years of 19.1 (red line).
The reasons for volatility are real, but the one constant of the market is there are always issues to worry about whether it is the economy, Federal Reserve policies, tariff policy or corporate earnings. When markets are more volatile it may make it difficult for investors to look through stock pullbacks and stay invested, but historically remaining invested has been the best course of action over the long term.
While volatility certainly increases investors’ concerns, volatility is not necessarily always a negative event. Volatility can be positive and refer to times when stocks are moving up rapidly. Most investors are more concerned with downside volatility, but market corrections are normal and can provide entry points for investors who are not invested.
At Gradient Investments, we believe a way to navigate the volatility in markets is to “bring an umbrella,” a theme we have discussed for 2025. We bring an umbrella because it may rain but it is not a certainty, so we want investors to be prepared if bad weather arises. The bad weather refers to a potential market correction and increased market volatility, but corrections are a normal part of the market in the same way that it is normal for volatility to increase from its low level.
Because we believe in bringing an umbrella that doesn’t mean we recommend changing your investment plan. After two strong years in the stock market, we think it is prudent to rebalance and realign your investment plan, since stocks may have a larger allocation than what was initially part of the plan. Another way of protecting against the possibility of rain is to allocate to the Gradient Buffered Index Portfolio, which provides a pre-determined level of downside protection and allows investors to participate in the market on the upside.
Posted here By Keith Gangl.