Stock market update today: More volatility may be around the corner, warns UBS

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Don’t get too comfortable.

Though volatility in the market has been notably tame (perhaps even boring) this week, UBS is urging caution: That lull probably won’t last.

“Wall Street’s most prominent gauge of investor anxiety, the VIX index of
implied stock volatility, closed below 17 on Thursday for the first time since
the pandemic began last year,” UBS Global Wealth Management chief investment officer Mark Haefele pointed out in a Friday note. “But with markets continuing to hit record highs, some investors are concerned that the recent decline in volatility may not last.” (Haefele’s point is punctuated by a trader’s reportedly massive bet that volatility will pick back up.)

Indeed, the S&P 500 index, a bellwether for the market at large, has kept hitting all-time highs this week, and its five-day chart shows a relatively orderly march upwards.

But UBS’s Haefele says, “We see reasons to expect periodic bouts of higher volatility in the near term.”

In particular, he believes that investors may be “torn between optimism over accelerating growth and worries over higher inflation,” as recent strong economic data “has reinforced the reflation narrative,” and that a “pickup in inflation could well unsettle investors.” Haefele also points out that the rise of new variants of the coronavirus is sparking uncertainty surrounding reopening, while volatility “has been sporadically heightened by increased institutional and retail activity in the options market, along with the increased share of growth stocks in major indexes.”

That’s not to say the bull market will be knocked off its course, however. UBS’s own Haefele also recently wrote that stocks tend to perform well after hitting new record highs, while others like Ally Invest’s Lindsey Bell believe the picture for stocks long-term is looking good. But she believes volatility is likely to stick around “for the next month or two while investors kind of digest this new environment that we’re working with, which is higher interest rates and potentially higher inflation,” she recently told Fortune.

Still, investors may be able to take advantage of any fits of anxiety in the markets: Haefele suggests “future downside volatility can create better entry points for investors seeking to build up longer-term exposure.”

But for now, investors may do well to buckle in for a possibly bumpy ride.