Traders work on the floor of the New York Stock Exchange (NYSE) Sept. 13.Brendan McDermid/Reuters
The stock market's fickle nature has returned in abundance in the past three trading days, ending a long stretch of uncharacteristic serenity.
The return of volatility from summer's lull has seen stocks around the world whipsaw from selloff to rally and back again. Broader sentiment has swung alongside speculation over the U.S. Federal Reserve's upcoming rate decisions, while a perceived setback in the oil market's gradual rebalancing fed Tuesday's pessimism.
On Tuesday, global markets were a sea of red, with major indexes in the United States and Canada dropping by more than 1 per cent, wiping out the gains from Monday's rebound and resuming the slump that started on Friday.
After going 43 successive trading days without a daily move of at least 1 per cent in either direction, the S&P 500 index has now posted three consecutive changes of that size. The S&P/TSX composite index, meanwhile, has declined by 3.1 per cent over the past three trading days.
"We came into September whistling past the graveyard. No more," said Patrick Horan, a portfolio manager with Agilith Capital.
In recent days, markets have been fixated on the Fed and trying to digest mixed messages from its officials regarding rate policy.
Rates that remain close to ultra-low levels established during the financial crisis have helped to sustain the bull market in stocks.
Stingy bond yields have made stocks more attractive by comparison, while cheap money has encouraged investors to take on risk in general.
But the market has been confused as to whether expect a hike next week.
Last Friday, Boston Fed president Eric Rosengren said the economy could overheat if the central bank waited too long to raise interest rates.
Those words shook the market from its dormancy. Government borrowing rates spiked, rattling stock markets in the U.S. and Canada with their biggest daily declines in more than two months. On the S&P 500 at least, the losses were led by rate-sensitive sectors such as utilities and telecoms.
Those same sectors outperformed on the way back up on Monday. That turnaround coincided with comments from Fed governor Lael Brainard, who released a postcrisis monetary policy manifesto that argued there's no rush to tighten.
Fuelling the current uncertainty are equity valuations that appear high relative to history, but are difficult to value at a time when interest rates, by many measures, have never been lower.
"The biggest challenge investors are facing right now is understanding the value of money," said Bryan Pilsworth, president and portfolio manager at Foyston Gordon & Payne.
Sovereign yields have risen in recent days, with the benchmark yields on 10-year U.S. Treasuries hitting 1.73 per cent on Tuesday. In early July, that key rate hit a record low of 1.32 per cent, which was simply too low given the condition of the economy, said Agilith Capital's Mr. Horan.
"The majority of portfolios out there are wrongly positioned for a rising rate environment," he said. As investors rebalance, "there's bound to be volatility."
With the Fed now in its premeeting silent period, lingering confusion over monetary policy was a likely factor in Tuesday's sell-off. But crude oil reprised its role as the market's chief spoiler.
Energy stocks tumbled after the International Energy Agency tempered its outlook for demand growth. The IEA said it now sees the global oversupply lasting into 2017.
The upside to volatility, of course, is the opportunity for investors to buy stocks at cheaper prices. And the snapback from any sustained sell-off has been a powerful and reliable phenomenon over the course of the bull market.
"We will absolutely take advantage of the dips," Mr. Pilsworth said. "It recycles capital from expensive stocks to cheaper ones."
With a file from Bloomberg News
Tim Shufelt