Stock Market Crash Alert: 3 Huge Sources of Volatility to Watch in Q1 thumbnail

Stock Market Crash Alert: 3 Huge Sources of Volatility to Watch in Q1

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Red stock chart on black screen heading downward, symbolizing a stock market crash

Source: Wongpradu

Fears of a deepening stock market crash continue to run hot in the new year. As we leave behind the virtual skyscraper of crushed portfolios in 2022 (politicians aside), there are still a number of sources of volatility poised to make 2023 just as unpredictable.

Currently, the S&P 500 and Nasdaq Composite are down nearly 17% and 30% from the same time last year. Compared to the record-breaking bull market in 2021, it’s hard to imagine trading conditions deteriorating so much in just one year. Looking back, however, there were a number of early signals that pointed towards slowdowns to come. These include the Federal Reserve’s aggressive monetary policy, global supply-chain disruptions and mounting recession fears. Indeed, even in Q1 2022 — fresh off one of the strongest years for stocks ever — there were indicators that things were amiss.

From its all-time high on Jan. 3, 2022, the S&P 500 fell 5.8% in its first month alone, clearly setting the tone for the rest of the year. Soon after, the 10-year and 2-year Treasury yields inverted, the first of many yield curve inversions to be. This was something of a precursor to the “technical recession” the country briefly entered later in the year.

Just one month later, Russia’s invasion of Ukraine would send global supply chains into turmoil, pushing up the price of certain commodities — namely energy — at the expense of businesses across the globe.

Heading further into 2023, things haven’t quite sorted themselves out. What are the sources of volatility in the new year?

Stock Market Crash Looms Large Amidst Q1 Volatility

According to LikeFolio, there are four major sources of Q1 volatility. At the top of the list is the Fed, and for good reason. Hawkish, dovish, bearish, bullish, for better or for worse, the central bank has had its hands all over the markets in 2022. That isn’t likely to change in Q1.

Rumors of a “Fed pivot” have floated around since the second half of 2022. Indeed, the notion that the Fed will suddenly open its eyes, realize it may have overtightened and make a quick, dovish reversal has become a popular narrative amongst analysts. Some believe it’s only a matter of time before the Fed lowers rates back down. This is, unfortunately, a major source of potential volatility. Should the Fed make it clear that a pivot is nowhere on the timeline — likely by way of an additional rate hike at the end of January — the markets may react unpredictably. The term “don’t fight the Fed” has never been more relevant.

The next source of volatility is the anniversary of Russia’s invasion of Ukraine. Feb. 24 will mark one year since the conflict began. Some political commentators believe the war may either ramp up or cool down as we approach that one-year anniversary. Either way, either change would mark a drastic shift for global markets across the world, let alone the S&P.

In a surprising twist, European temperatures may also stir up the markets in surprising and unpredictable ways. Currently, at least eight countries are experiencing record-high temperatures, interrupting a number of seasonal businesses as a result. A number of ski resorts have already shut down.

Interestingly, this is something of a benefit to Europe as a whole, which has struggled with energy prices since the Russia-Ukraine war began. Should a cold streak hit the continent, the impact on oil prices and inflation would likely prove more detrimental than the current heat wave.

The last potential source of volatility in Q1 worth outlining is the increased focus on corporate earnings and macroeconomic projections. It seems like every other week there’s some new data release pertaining to inflation, consumer spending, jobs and, of course, corporate earnings. Just today, a relatively lukewarm jobs report pushed the market toward its first big rally of the year.

Early in the year, it’s clear that many market operators are on edge. Traders seem eager to buy or sell en masse based on the report of the week. Heading further into Q1, this renewed focus on macro signals could prove to be a major source of volatility — or even a stock market crash.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.