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Charles Schwab expert notes correction is not synonymous with volatility

by Giselle Rances | Apr 28, 2018

Volatility tends to rise in the final years of an economic cycle.
Volatility tends to rise in the final years of an economic cycle. | File photo

While some investors are wondering when the high volatility of the stock market will end, one expert with Charles Schwab notes that question isn't necessarily the same as asking when the correction will be over.

In a recent Market Commentary, Jeffrey Kleintop writes that while the correction could be over soon, the heightened volatility may not go away for a long time.

"It’s possible we could see a break from the losses this month, but not necessarily from volatility," Kleintop writes. "Investors often associate volatility with losses — but that isn’t always the case. Stock markets have just as often seen high volatility when markets are rising as when they are falling."

April is historically a month for market recovery, trailing only December in losses since the establishment of the MSCI AC World Index in 1988. In fact, April has been a loser only seven times in 30 years and even recorded in 2008 and 2009 during the Great Recession.

Another historical pattern points to a rebound, as on average stocks fall for approximately 13 weeks after a correction.

"These historical patterns may hold, suggesting that the stock market may revive as the earnings reporting season unfolds and tax refunds are invested over the remainder of this month," Kleintop writes.

Working against a recovery, he notes, are fears over trade wars, currency wars, and -- following military action in Syria -- and actual war. These factors, he writes, combat investor confidence.

"History shows us that the current pick up in volatility may be with us, not just for a couple of months or even all of 2018, but for several more years to come," Kleintop writes. "Volatility in the form of 1 percent or more daily price changes tends to rise in the last couple of years of an economic cycle, ahead of a recession and bear market, and remain high for a year or two after the bear market is over and a new bull market has begun."




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