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​​Market Volatility in 2023

A bar chart with a staggered arrow implying ups and downs

2023 Market Volatility In Isolation

2023 has been a year wrought with factors pushing and pulling the price of equities. From the continued evolution of Artificial Intelligence technology to sustained high-interest rates and the recent escalation of the Israel-Palestine conflict. By just looking at the headlines throughout the year, one would think that 2023 has been a relatively volatile year, but is this really the case? By looking at an overall volatility index and the effect of major events throughout the year on the market, we should be able to grasp an understanding of how 2023 compares to previous years.

In order to measure and compare volatility in the market, we will use the Chicago Board Options Exchange’s CBOE Volatility Index (VIX), which is a measure of the stock market’s expectation of volatility based on S&P 500 index options. It is one of the most popular ways of measuring volatility in the market, and so we will use it in our analysis.

The year started off with the VIX index at 22.90 after a decline over the previous few months as the market adjusted to the new reality of high interest rates. This trend continued for the first few months of the year until the 7th of March when the interest rate increases finally came to a head with the bank run-on and eventual collapse of Silicon Valley Bank (SVB) and the forced merger of Credit Suisse with UBS. SVB collapsed on Friday, the 10th of March, and over the two days prior to the SVB collapse, VIX rose by 23% from 19.11 to 24.80 and eventually to 26.52 on the following Monday, the highest value recorded this year so far. The effects of this situation on market volatility slowly rescinded over the month until, on the 31st of March, the index was back down to 18.70.

Market volatility graph showing impact of SVB collapse and Israel-Hamas War

Since this incident, there has continued to be a downward trend in the VIX index, reaching a low of 12.91 in late June, which was followed by a plateau until early August. At the start of August, the market reacted to robust economic data, upbeat corporate guidance, and easing geopolitical concerns, leading to a jump in equity prices. The corresponding increase in volatility lasted until the end of the month as uncertainty surrounding further interest rate increases battled with this positive economic news in the minds of investors. Volatility ticked upwards once again on the 21st of September by 13% to 17.54 as stocks plummeted after hawkish comments from Fed Chairman Jerome Powell hinted at interest rates staying higher for longer. This volatility continued until the beginning of October.

The most recent major event in the year has been the escalation in the conflict between Israel and Hamas, which began on the 7th of October when Hamas gunmen conducted a sneak attack on Israel, killing 1,400 people in the process. This did not have a major effect on volatility until the 13th of October when Israel called on all civilians in Gaza to leave their homes and head south ahead of a ground invasion by the IDF. This increased fears that a ground invasion could lead to other countries in the region entering the conflict, leading the VIX to increase from 16.69 to 19.32. The peak of the VIX index in the conflict so far was on the 20th of October, when it reached 21.71. The increased volatility during this period can also be partly attributed to U.S. bond yields reaching close to 5%, affecting the desirability of riskier assets such as equities. Despite continued bombing and the initiation of the ground invasion by Israel, the volatility index has dropped off a cliff, falling 43% to 14.91 in the week up to the 3rd of November. This fall was most likely due to the combination of the declining probability that other countries will fall into the conflict and economic data hinting that rates in the United States may be at their peak.

2023 Market Volatility in Context

Now that we know how volatility has acted so far in 2023, by comparing this to years past, we will be able to gain a greater understanding of how volatile 2023 has been relative to recent years. The largest jump was obviously the initial outbreak of COVID-19 in February and March of 2020, which led to an atmospheric rise of 480% in the volatility index to 66.04, the highest level since the GFC in 2008. After that, there were a few spikes, but the general trend was downward to a low of 15.07 in July 2021. In late 2021, the outbreak of the Omicron variant of COVID-19 caused the VIX to almost double from 16.29 to 30.67. This was followed by multiple spikes throughout 2022, mostly caused by the Russian invasion of Ukraine as well as fears surrounding high inflation data and central bank rate increases, all these spikes sending the volatility index into the 30s.

Throughout 2020, 2021, and 2022, the average level of volatility was higher than it has been in 2023. If you look further back into the 2010s, it becomes clear that 2023 represents the economy returning to somewhat normalcy in regard to the level of volatility present. So, when taken in isolation, it may seem that the economic environment in 2023 has been highly volatile due to the results of high-interest rates and outside factors such as the outbreak of war, but it has actually been a fairly relaxed year relative to the past five years.

Market volatility graph showing impact of Covid-10 and rising interest rates over last five years

Summary and Reflection

As we reflect on the financial landscape of 2023, it's clear that this year has brought its fair share of market fluctuations. Amidst evolving scenarios such as advancements in AI technology, persistently high interest rates, and geopolitical developments, it's natural to feel a sense of uncertainty. However, our analysis, grounded in the movements of the CBOE Volatility Index (VIX), reveals an encouraging perspective.

While individual events have momentarily swayed the markets – the Silicon Valley Bank situation, geopolitical tensions, and central bank policy shifts, to name a few – the overall trend of market volatility in 2023 has been relatively moderate, especially when viewed against the backdrop of the past few years. The extreme volatility witnessed during the initial COVID-19 outbreak and other high-impact events of recent years dwarfs the fluctuations we've seen this year.

This context is crucial as it underscores a fundamental truth of investing: markets ebb and flow. The relative calm of 2023, in terms of volatility, signals a gradual return to what might be considered a 'normal' market environment. For you, this means that a diversified investment strategy remains your best tool for navigating these waters. Diversification not only helps in cushioning against short-term market swings but also positions your portfolio to take advantage of long-term growth opportunities.

In summary, while vigilance and adaptability are always key, there's a strong case for confidence and steadiness in your investment journey. We're here to guide and support you every step of the way, ensuring that your portfolio is well-equipped to meet the challenges and seize the opportunities that lie ahead.


The information provided in this communication has been issued by Centrepoint Alliance Ltd and Ventura Investment Management Limited (AFSL 253045).

The information provided is general advice only has not taken into account your financial circumstances, needs or objectives. This publication should be viewed as an additional resource, not as your sole source of information. Where you are considering the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure for the relevant product before you make any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. It is imperative that you seek advice from a registered professional financial adviser before making any investment decisions.

Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Centrepoint Alliance Ltd nor its related entities, guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution.


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