Market Insider

Buckle Up: Stock Market Volatility Could Get Worse

Karina Frayter, CNBC Markets Producer

Wild stock market swings, rocking Wall Street since mid-summer, are likely to last through next year, and investors should get ready for even greater volatility, warn analysts.

Caroline Purser | Getty Images

“I expect volatility to remain high in 2012,” says Mark Luschini, chief investment strategist at Janney Montgomery Scott. “The lack of a clear trend in global economic activity, due to lingering issues in Europe and our domestic situation, will sway market sentiment and bring with it sizeable swings in stock prices.”

Moreover, key countries like China, Russia, France, and the United States will hold national elections next year, and that could potentially amplify stock market volatility.

“We may have different political regimes coming to many different countries at the same time, which means markets may be adjusting to new policies,” says Luschini.

The current pre-election environment in the U.S. is already unnerving investors, notes Robert Whitelaw, professor of entrepreneurial finance at the NYU Stern School of Business.

“Election years aren't always volatile, but I think the 2012 election has brought out the worst in both the incumbents and those running to replace them—not enough focus on the real issues, ridiculous plans and grandstanding,” Whitelaw told CNBC.

But Richard Keary, founder of Global ETF Advisors, is optimistic the volatility will subside next year.

“There is no structural damage to our markets, and demand is being pent up,” says Keary. “Once we strike a chord of cooperation amongst our policymakers in Washington, the road to stability in our markets is relatively short.”

Analysts agree, however, that excessive political posturing and gridlock in Washington have been one of the main culprits in the recent market turmoil.

"It is almost at the point that specific policy isn’t the issue but the fact that they can’t come together and agree on a direction,” says Keary.

Investors have been jumping between euphoria and panic in recent months, reacting to every headline related to the European fiscal crisis and U.S. economy, at times causing dramatic intraday stock market moves in opposite directions.

Since August, the Dow Jones Industrial Averagemoved up or down by more than 100 points in one day 71 percent of the time, 35 out of the last 49 trading sessions, according to data from Dow Jones Indexes.

And current market structure with high-frequency trading and investment vehicles like leveraged exchange traded funds have helped to exaggerate the swings, say some analysts.

As a result, market volatility, as measured by the popular VIX index , is at its most persistently high level since 2008-2009.

Volatility Hits Confidence

Continued volatility is bad news for the markets.

Erratic stock price fluctuations already brought the initial public offering activity to a virtual standstill. Not one company went public in the U.S. since August, and a slew of firms withdrew their offerings citing unfavorable market conditions.

Anxious investors also have been running scared from the stock market, just as they did during the financial crisis. They pulled out a total of $60.4 billions from global stock markets in July and August alone, according to Investment Company Institute.

Many analysts believe more clarity in the European debt crisis may help tame the volatility.

“Until there is a resolution of some sort to the European situation—a Greek default and the aftermath, I don't see volatility falling much if any,” says Whitelaw.

Janney’s Luschini agrees and says even internal U.S. politics might matter less for investors if issues in Europe are resolved.

Meanwhile, Pamela Hess, director of retirement research at Aon Hewitt, advises investors to prepare for more market turbulence in 2012.

Hess says some investors may feel safer with such investments as target-date funds or with managed accounts.

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