Stocks Face Increased Volatility: Key Causes and What Lies Ahead

Investors often seek ways to grow their nominal wealth. Popular methods include buying real estate, investing in Treasury bonds, or purchasing commodities such as gold, silver, and oil. However, stocks have historically outpaced other asset classes over the last century with impressive average annual returns.

Yet, despite stocks being a solid long-term wealth builder, they can experience drastic fluctuations over shorter periods without warning.

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April’s Market Turbulence and Record Volatility

April was a tumultuous month for investors. The Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC) all faced significant downturns, with the Dow and S&P dipping into correction territory while the Nasdaq fell into a bear market. These indexes experienced unprecedented volatility.

Image source: Getty Images.

For example, the S&P 500 faced its fifth-worst two-day percentage drop in 75 years, alongside its 12th-largest four-day decline since 1950. This volatility was quickly followed by record point increases on April 9 for the Dow, S&P 500, and Nasdaq Composite.

As volatility spikes, investors often look to historical metrics and events for guidance, hoping to gain insights into potential market direction. While no correlation can definitively predict future stock movements, some events have shown a strong track record for forecasting subsequent performance.

Anticipating Continued Volatility on Wall Street

Before reviewing a key S&P 500 event that has historically predicted future trends, it’s essential to understand the factors fueling Wall Street’s recent instability—many of which are likely to persist. One significant factor is President Donald Trump’s tariff policy, which has rattled the stock market for various reasons.

On April 2, Trump announced a 10% global tariff along with higher “reciprocal tariffs” on numerous countries with trade deficits with the U.S. Although he announced a 90-day pause on these tariffs for all countries except China on April 9—a day marked by the largest single-day point gain for the major indexes—few trade deals have emerged thus far.

Tariffs pose risks as they can strain trade relations and may lead consumers in other countries to turn away from American products. Additionally, input tariffs could raise manufacturing costs in the U.S., exacerbating inflation concerns.

Wall Street’s major stock indexes have experienced a turbulent ride. ^DJI data by YCharts.

Moreover, U.S. economic data is adding to the whipsaw effect on Wall Street. The initial first-quarter gross domestic product (GDP) estimate indicated the U.S. economy contracted by 0.3%. While the stock market doesn’t always move in tandem with the economy, this first contraction in three years suggests that corporate earnings may take a hit.

The high valuation of the stock market is another source of volatility. Slowing corporate earnings growth amid high stock prices creates an unfavorable scenario for investors. In December, the S&P 500’s Shiller price-to-earnings (P/E) ratio reached a high of 38.89, marking only the third instance in 154 years of back-testing where the Shiller P/E exceeded 38. Historically, the average ratio has been about 17.

When the S&P 500’s Shiller P/E has surpassed 30, the market has subsequently lost at least 20% of its value in the five previous instances.

These challenges—Trump’s tariffs, economic uncertainty, and high market valuations—are not expected to dissipate soon.

Image source: Getty Images.

Key S&P 500 Event Signals Future Market Direction

With a clearer understanding of the factors influencing Wall Street’s volatility, let’s focus back on the S&P 500 and its noteworthy event.

Investors are likely familiar with terms like “correction” and “bear market.” A correction occurs when an index falls at least 10% from a previous high, while a bear market refers to a decline of 20% or more from a peak.

However, since 1950, the S&P 500 has experienced numerous corrections that came close to bear market thresholds but never quite reached them. On April 8, the index saw an 18.9% drop from its closing high on February 19. Should this level be identified as the low point, it would represent the eighth occurrence in 75 years where the S&P approached a bear market.