Stock Market Volatility Is Picking Up — and That’s Fantastic News for Investors

Although the stock market has run circles around all other asset classes over the last century, history shows that equities don’t rise in a straight line.

Over the last five weeks, the Dow Jones Industrial Average (DJINDICES: ^DJI) and Nasdaq Composite (NASDAQINDEX: ^IXIC) have dipped into correction territory with respective double-digit percentage declines, while the S&P 500 (SNPINDEX: ^GSPC) has lost as much as 9% of its value.

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While elevator-down moves and heightened volatility have a way of tugging on investors’ heartstrings, they also create undeniable opportunities — backed by decades of data — for long-term investors to pounce.

Before diving into the data, let’s establish the “why?” behind the recent spike in the CBOE S&P 500 Volatility Index (VOLATILITYINDICES: ^VIX). The VIX, as the CBOE S&P 500 Volatility Index is better known, reflects expected stock market volatility in the S&P 500 over the next 30 days.

The most prominent catalyst that’s fueling uncertainty on Wall Street is the Iran war. Shortly after the U.S. and Israel began military operations against Iran on Feb. 28, the latter closed the Strait of Hormuz. Approximately 20% of the world’s liquid petroleum travels through the Strait of Hormuz daily, meaning we’re witnessing the biggest energy supply disruption in history.

Additionally, the U.S. inflation rate is expected to soar in March (and possibly beyond). Oil price shock events are far-reaching and affect more than just the price of gas at the pump. We’re likely seeing growing concern about the Federal Reserve shifting its monetary policy stance away from rate easing to rate hiking.

Speaking of the Fed, we’re also only six weeks away from Jerome Powell’s last day as Fed chair. Change at the central bank doesn’t occur often, but the upcoming shift in leadership comes at a time when the stock market is historically expensive.

Suffice it to say, there are several reasons for investors to be on edge.

Although steep red arrows can be scary at times, especially for newer investors, periods of heightened volatility have historically been nothing short of rocket fuel for stock returns.