A Perspective on Recent Market Volatility

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May 9, 2022

Markets are said to abhor uncertainty, often displaying their displeasure through sudden, heightened levels of price volatility. Due to a confluence of factors that The Mather Group, LLC (TMG) will explore in this report, markets last week experienced volatility levels not seen since the outset of the pandemic in March 2020.

More specifically, last Wednesday—despite a significant interest rate hike announced that day by the Federal Reserve Board (Fed)—the S&P 500 rose 125 points, or 3.0%. The tech-laden National Association of Securities Dealers Automated Quotations (NASDAQ) Index rose in tandem 401 points, or 3.2%. On the following day, however, the S&P 500 fell 153 points, or 3.6%. The NASDAQ also fell 647 points, or 5.0%. Thus, in just two market sessions, the S&P 500 rose and fell 278 points, or 6.7% of its closing value on Tuesday. The NASDAQ’s round trip on those two days was 1,048 points, or 8.3% of Tuesday’s closing value.

Such sudden volatility levels are concerning, both to investors and to TMG. However, as shown in the graphic below, the frequency of such significant market shifts is not uncommon. More specifically, market declines of 10% or more have occurred in 10 of the last 20 years (2002-2021), with an average fall of 15% during each of those 10 years. Despite these sudden market declines, the market eventually rose and turned positive in 17 of those 20 years. Overall, the annual market advance over those 20 years was 7%.

TMG’s research suggests that there are at least four primary factors underlying recent market volatility. The first is the Fed’s abandonment of its prior belief that current inflation surges were “transitory,” resulting in its recent strategy to contain inflationary pressures through significant and ongoing interest rate hikes.

The Fed’s interest rate of choice is the “Fed Funds Rate,” which is the rate at which commercial banks lend excess reserves to other banks on an overnight basis. With last Wednesday’s 0.50% rate hike, the Fed has raised its target rate to 0.75%–1.00%. Market expectations, as measured by Chicago Mercantile Exchange Fed Funds futures, are that this rate will continue to increase to a level of 2.75%–3.00% at the end of 2022. In contrast, at the beginning of 2022, this rate was only 0.08%, demonstrating the Fed’s urgency to restrain inflationary forces. Not unexpectedly, such rate increases have pulsed through markets such as 30-year fixed-rate mortgages, which are now 5.27%, having risen from 2.96% one year ago.

A second factor is that the Fed has also announced it will begin reducing its significant bond holdings. At the beginning of the pandemic in 2020, the Fed held $4.2 trillion of Treasury and mortgage-backed bonds on its balance sheet, equivalent to the average level it has held since 2014. With multiple rounds of U.S. government pandemic stimulus starting in 2020, the Fed’s active purchase of these bonds ballooned its holdings to $8.9 trillion by April 2022, a 112% increase.

The Fed made these purchases to support Treasury financing of these stimulus programs, and to support the U.S. housing market. It will now reduce these holdings by $95 billion per month, further elevating longer-term rates across U.S. and global bond markets. The magnitude and timing of these proposed Fed reductions have been a primary source of recent bond market price volatility.

A third factor has been expanding geopolitical risks in Eastern Europe. While the outcome of this conflict remains uncertain, it is assuredly intertwined with global inflationary pressures in the energy, agriculture, and other commodity markets. For example, the distortion in energy markets due to recent sanctions has raised the price of U.S. crude oil to $110 in early May, climbing $34, or 45%, since January 2022. U.S. wheat prices are $10.90 per bushel in early May, having risen 26% since the invasion of Ukraine. There is little evidence in the futures markets that these prices will decline shortly.

A fourth factor affecting U.S. markets is an increasing recessionary concern that U.S. households, having to allocate more funds for gas and food, will decrease their spending levels for other products and services. In addition to these so-called “share of wallet” concerns, U.S. consumer confidence, as measured by the University of Michigan, has fallen to a level of 65.2 from its 82.9 level only 12 months ago. Such a decline may lead to consumers delaying their purchase of such consumer durable items as home appliances and autos. Consumer spending, of course, accounts for 70% of U.S. gross domestic product (GDP), so any significant decline could be recessionary.

Given this recent market volatility, what is the potential outlook for markets in its aftermath? Historical market data from the last 95 years, starting in 1926, suggests sudden market downturns often result in significant market rebounds over a 1-, 3-, and 5-year horizon. The table below displays annualized returns following a 10%, 20%, or 30% market downturn during this 95-year period. Of course, prior performance is no guarantee of future results.

Regardless of market volatility, your financial plan plays a critical role in helping you maintain progress toward achieving your financial goals. Your trusted TMG advisor is ready to respond to any questions or concerns you might have, and to help assure that your financial plan remains both timely and actionable. Please reach out to your advisor for guidance at any time.


Data Sources: Bloomberg; Charles Schwab & Company; Chicago Mercantile Exchange; Dimensional Fund Advisors; Federal Reserve Board; Mortgage Bankers Associations; Reuters; US Treasury; University of Michigan; Wall Street Journal

The Mather Group, LLC (TMG) is registered under the Investment Advisers Act of 1940 as a Registered Investment Adviser with the Securities and Exchange Commission (SEC). Registration as an investment adviser does not imply a certain level of skill or training. For a detailed discussion of TMG and its investment advisory services and fees, see the firm’s Form ADV on file with the SEC at www.adviserinfo.sec.gov, or on the firm’s website at www.themathergroup.com. The opinions expressed, and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. The opinions and advice expressed in this communication are based on TMG’s research and professional experience and are expressed as of the publishing date of this communication. All return figures and charts shown are for illustrative purposes only. TMG makes no warranty or representation, express or implied, nor does TMG accept any liability, with respect to the information and data set forth herein. TMG specifically disclaims any duty to update any of the information and data contained in this communication. The information and data in this communication does not constitute legal, tax, accounting, investment, or other professional advice. Investing involves some level of risk. Past performance does not guarantee future results.

An investor cannot invest directly in a presented index, as an investment vehicle replicating an index would be required. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Please feel free to contact us for additional information on any indices mentioned in this commentary. 


  • Standard & Poor's (S&P) 500 - A stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.
  • NASDAQ 100: A stock market index of the common stocks and similar securities listed on the NASDAQ stock market, which has more of a growth focus.

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