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Written by: Jordan Jackson
Relative to the last 20 years, volatility across equities, bonds, and currencies were higher than normal.
2022 was a roller coaster for investors with Russia’s invasion of Ukraine challenging global energy supply, central banks pivoting aggressively to combat high inflation, fading, yet still widespread effects of a global pandemic impacting consumers, businesses, and supply chains, and elevated political uncertainty shifting the landscape of economies globally. In summary, 2022 was a volatile year.
As highlighted, relative to the last 20 years, volatility across equities, bonds, and currencies were higher than normal; interest rate volatility was the highest since 2009, equity volatility was the highest since 2020—the year a global pandemic ravaged markets, while currency volatility was the highest since 2016—when China devalued its currency.
Central banks may be blamed as the main culprit for the pickup in volatility. Indeed, rate volatility was most elevated relative to other asset classes as central banks shifted aggressively to bring down inflation many economies had not experienced in decades. The European Central Bank lifted rates swiftly from negative territory, the Bank of England quickly raised rates to restrictive, the Federal Reserve (Fed) increased rates at its fastest pace since the early ‘80’s, and the Bank of Japan may be gearing up to abandon its ultra-accommodative yield curve control policy, all contributing to the move higher in global rates and the sell-off in equities. Currencies, as an extension of interest rates, were also quite volatile as the dollar rose materially given the Fed’s leadership in this global tightening.
All things considered, as we highlight in our 2023 investment outlook, next year may be a slow year for the global economy, but a better year for markets. It is well known that monetary policy impacts economies with long and variable lags and economies may still be dealing with the hangover of aggressive central bank tightening this year. That said, markets are forward looking, and as the year progresses may look past current weakness towards reasons for optimism in 2024.
We expect volatility to settle down across asset classes in 2023, as central banks pause, and possibly pivot to a more neutral policy stance. As such, while investors may be happy to close the books on 2022, next year is looking more promising for investment returns.
Volatility was elevated across asset classes in 2022
Z-score for equites (VIX), interest rates (MOVE) and currency (JPM FX VXY), 20 years, average weekly level per year
Source: Merrill Lynch, Haver Analytics, CBOE, J.P. Morgan Economic Research. Bars shown are the calendar year z-score based on the weekly averages of the volatility indices referenced in that year relative to the past 20 years of weekly data. Equity volatility is measured by the VIX index; interest rate volatility is measured by the MOVE index; currency volatility is measured by the JPM FX VXY Global index. Data are as of December 27, 2022.
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