Investors beware – stocks are far more volatile than they look

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Plenty of market types are puzzled by the absence of financial panic as no fewer than four major economic disruptions converge.

We’re seeing minor selloffs here and there. On Wednesday, the primary U.S. and Canadian stock indexes declined by 1 to 2 per cent as spiking oil prices give rise to inflation risks.

They haven’t amounted to much, though. On the year so far, U.S. stocks are down by about 3 per cent. The TSX is up by about 2 per cent.

That’s tough to square with the macro shocks now menacing the real economy: the conflict in Iran, the tariff wars, the artificial intelligence revolution, and the trouble brewing in private credit.

Stock markets today: Major indexes close near lows as oil prices rise and traders pare U.S. rate cut bets after Fed decision

Rest assured, the turmoil is there, it’s just hidden. Beneath the relatively calm surface of the stock market, a frenzy is churning.

Some Canadian blue chips have been pulverized, for example. Brookfield Asset Management Ltd., Constellation Software Inc., Thomson Reuters Corp., and Shopify Inc. are all down by 30 to 60 per cent from their 52-week highs.

Lots of big U.S. names have suffered the same fate, including Oracle Corp., Salesforce Inc., Netflix Inc. and Microsoft Corp.

Individual stocks always bounce around more than the index, but not like this.

A couple of weeks ago, Barclays ran the numbers and found that single stocks were seven times more volatile than the broader stock market, which is the largest gap in at least 30 years, the company’s analysts said.

Other firms using different calculations have also found that single-stock volatility relative to the broader market is higher today than even during the global financial crisis.

What is happening here? Nobody wants the stock market to sink, but does it not feel like it should be?

Part of the answer is that the shocks that have arisen seem to be conveniently offsetting. On one hand, the AI trade has crushed software stocks, on the premise that AI tools will make it possible for companies to build cheap, in-house alternatives to expensive software. Thus you have software giants like Salesforce Inc. and Constellation Software getting hammered by investors.

On the other hand, the run-up in energy prices in reaction to the worst disruption to the global oil supply on record has catapulted energy stocks higher. The three largest oil and gas producers on the TSX – Canadian Natural Resources Ltd., Suncor Energy Inc. and Imperial Oil Ltd. – are all up by at least 40 per cent year-to-date.

Software down, energy up. Even-steven, sort of.

There is a similar cancelling-out in other pockets of the financial markets. A flood of redemptions in private markets has weighed heavily on private capital giants, including Blackstone Inc., KKR & Co. Inc., and Apollo Global Management Inc.

But these are boom times for defence stocks as the likes of Lockheed Martin Corp. and Northrop Grumman Corp. have each gained around 30 per cent so far this year. You can count Canada’s MDA Space Ltd. as a big beneficiary on the TSX.

And so the scales of finance are more or less level, for now. But it’s a shaky equilibrium at best.

A sustained oil price shock is both growth-negative and inflation-positive. Suddenly, interest rate hikes are creeping back into forecasts.

Such things would normally spook investors out of their pants, especially considering the conflict in the Middle East that has upset the flow of oil only seems to be escalating.

“It’s interesting to see so much complacency in equities with so little chance of a resolution,” Brent Donnelly, president of New York-based research firm Spectra Markets, wrote in a recent newsletter. “The holding pattern cannot last.”

Even absent a substantial market-wide slump, investors are exposed. With so much volatility under the hood, individual stock holdings are vulnerable.

“Any company in your portfolio should be screened for any present and future disruption and the earnings implications,” economist David Rosenberg said in a note.

It’s a dangerous moment, even if the stock market, on its surface, is suggesting otherwise.