Phases of Market Volatility: A Reflection on History
This is an insightful chart sourced from DSP Netra, illustrating how market volatility comes in distinct phases over the decades. The key takeaway is that markets alternate between prolonged periods of stability and intense phases of drawdowns. Let’s explore this in detail.
Decades of Calm vs. Chaos
Over the past 40–50 years, the US market has shown distinct patterns. From 1979 to 1987, there were no drawdowns greater than 20%. This was a calm period for investors. But the phase from 1987 to 2002–03 was markedly different, with several deep drawdowns of 40–50%, including the infamous 1987 crash and the dot-com bubble burst.
Similarly, from 2003 to 2008, the markets entered another tranquil phase with no sharp drawdowns. But after the 2008 financial crisis, volatility returned, with steep corrections of 60%, 30%, and 24% seen in subsequent years.
The Post-2016 Stability
From 2016 onward, apart from the COVID crash, markets have remained relatively stable. This low-volatility environment has been fueled by:
Massive Liquidity: The unprecedented money printing by central banks injected substantial liquidity into markets.
Increased Market Participation: Retail and institutional investors have both shown a strong inclination toward equity markets.
Are We Entering a New Phase of Volatility?
The question now is whether we are moving into a phase of heightened volatility. There are indicators that suggest we might:
Geopolitical Tensions: US-China trade conflicts and the Russia-Ukraine war are reshaping global economic dynamics.
Macroeconomic Shifts: Rising interest rates, inflation concerns, and shifts in monetary policy may act as triggers for volatility.
Economic Uncertainty: As global economies recover post-pandemic, challenges like deglobalization and supply chain disruptions could lead to instability.
The Way Forward for Investors
This does not mean investors should shy away from equities. It means having a balanced approach is critical:
Diversify across asset classes like gold, international equities, and bonds to smooth out portfolio returns.
Consider strategies that hedge against volatility, such as options or alternative investments.
Be prepared for phases where stocks may not perform well and have a long-term perspective to ride through turbulent times.
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