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What Drove Market Volatility in 2023?



The following content is sponsored by New York Life Investments
What Drove Market Volatility in 2023?

What Drove Market Volatility in 2023?

Market volatility was notably calm over 2023—in a striking contrast from last year.

In fact, the Cboe Volatility Index (VIX), a common measure for tracking volatility, dropped to four-year lows in December after the Fed signaled interest rate cuts in 2024.

This graphic, sponsored by New York Life Investments, shows the key factors that influenced volatility this year and how to navigate the path forward.

The Macroeconomic Climate

To start, investors were closely watching how macroeconomic uncertainties would unfold in 2023. Here’s how they compared to last year:

Indicator2022 vs 2023LevelDate
InflationModerated3.1%Nov 2023
Unemployment RateIncreased3.7%Nov 2023
GDP GrowthIncreased5.2%Q3 2023
Interest RatesIncreased5.25 - 5.50%Dec 2023

How did investors react to the shifting economic climate, and did this cause volatility to spike?

Looking Back at Market Volatility

In 2023, moderating inflation, solid consumer spending, and labor market strength tempered investor fear, leading volatility to fall.

Yet there were a few noteworthy spikes. During the U.S. regional banking crisis in March, the VIX jumped above 30 amid heightened investor panic about bank profitability. Later in May, volatility spiked again after the Fed raised rates for the 10th time as it began speculating on ‘higher for longer’ rate scenarios.

After this point, volatility dropped significantly. Inflation had fallen for five consecutive months, hitting an annual low of 3% in June, down from 6.4% in January.

It was not until the growing conflict in the Middle East in October that volatility jumped—but following strong economic data in December, the VIX hit 12.1, its lowest point since late 2019.

Why Time in the Market Matters

While some argue that volatility could remain muted, others suggest it could increase again in 2024, citing an overheated market and credit market strains.

To help navigate market volatility looking ahead, investors can remember to keep a long-term view. Consider the hypothetical performance of an investor who stayed invested in the market versus missing out on its best days:

Performance of $10,000 Invested in the S&P 500 Index
Annual Return
Fully Invested$64,844+9.8%
Missing the 10 Best Days$29,708+5.6%
Missing the 20 Best Days$17,826+2.9%
Missing the 30 Best Days$11,701+0.8%
Missing the 40 Best Days$8,048-1.1%
Missing the 50 Best Days$5,746-2.7%
Missing the 60 Best Days$4,205-4.2%

As the above table shows, by trying to time the market, investors may lose out on more than 50% of their return potential.

Not only that, the market’s best days often happen closely after the worst days. The good news is that since 1928, S&P 500 annual returns have been positive 74% of the time, reinforcing the value of sticking it out through market swings.

Investment Opportunities

In 2024, a blend of equities, bonds, and alternatives may allow investors to navigate volatility:

  • “Quality” U.S. Equities: Strong profitability and earnings growth potential may increase resilience.
  • Investment-Grade Bonds: Stable cash flows and attractive yield potential may strengthen returns.
  • Alternatives e.g. Real Estate and Commodities: Low correlation to traditional assets may lower risk and increase diversification.

Together, a balanced portfolio may help capture return potential in the year ahead.

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