Volatility endemic to high-flying markets

It has been a tough run for the euphoria trade of late. Bitcoin was off by more than 50 percent from its mid-April high at one point over the weekend, with many other cryptocurrencies following suit, while NFT sales volumes have similarly plunged from their peak in early March. There have even been some ripples in the red-hot market for physical collectibles; a LeBron James rookie card, for example, sold this week at a nearly 60 percent discount to its price of just two and a half months ago.

Choppiness is to be expected after the big runs of the past year, however, especially in the more fledgling asset classes. Volatility has tended to pick up after outsized moves even in the relatively staid equity market and not always in conjunction with a reversal of those changes. In fact, the S&P 500 has historically been much more likely to build on annual increases of at least 20 percent than to retrace some of those gains in the subsequent year.

And as the experience of the late 1990s shows, large drops in individual asset prices are far from sufficient evidence that the zeitgeist has sustainably shifted. Some of the highest-flying stocks of that era suffered sizeable short-term pullbacks en route to the massive rallies over the longer haul; Amazon, for example, plummeted by just under 60 percent in the spring and summer of 1999, Ebay was down by 65 percent over roughly the same time frame, and Qualcomm, in advance of its 2600 percent run in ’99, tumbled by 44 percent in 1997-98 (and these are the survivors; there were several Nasdaq components that dropped by 80 percent or more in every year of the late 1990s surge).

That period, of course, was defined by a ‘buy the dip’ mentality. The S&P 500 fell into corrections in 1997, 1998, and 1999, but snapped back quickly in each case (it takes nine months on average for the S&P to completely retrace its correction declines, but the index was back at new highs in those three episodes in just two months, four months, and four months, respectively). It remains to be seen whether the same mentality will prevail in this cycle, but the behaviors that have produced the extremes of the last 14 months and the monetary policies that have abetted them at least strongly hint in that direction. In any event, the recent high-profile retrenchments in some markets might represent pauses in longer-term uptrends or idiosyncratic shakeouts, but, with the economic cycle still in its early stages and the Fed still planted firmly on the sidelines, it is unlikely that they mark an end to the euphoria.

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