The persistence and strength of inflation was a major driver of volatility in 2022, yet while inflation may reach its peak in the coming quarters, investors should not expect a decline in volatility anytime soon.
The data also underlines the scale of volatility recorded last year. The VIX equity volatility Index ended above its historical average on 94% of trading days; the bond market’s MOVE Index was above average on 87% of trading days; and the S&P 500 moved by more than 2% on a daily basis 61 times compared to only 7 in 2021.
Against this backdrop, central banks were forced to raise rates aggressively to preserve their main asset: credibility. The collective failure to recognise and control inflation could still lead to sustained second-order inflationary pressures and a hard landing for economies.
Despite this, we believe that markets may find some relief in a potential peak both in inflation and in central bank hawkishness in the next quarters. However, we expect volatility to remain elevated and prone to sudden spikes in 2023, as the headwinds that hindered markets in 2022 will gradually dissipate.