More volatility could lie ahead for investors

ByABC News
October 3, 2007, 10:34 PM

— -- In the end, your 401(k) holdings probably performed well this quarter. But let's not forget the stomach-churning ride it took to get there. By any measure, stock market volatility has been galloping at dizzying speeds.

Since 1950, the Standard & Poor's 500-stock index has posted a daily loss of more than 2% on an average of four days a year. Yet in just the past nine months, the S&P 500 has posted daily losses of more than 2% six times. Or look at it this way: The Dow Jones industrial average gained or lost more than 1% on 24 days in the third quarter the same number of times it did for all of 2006.

If you're feeling queasy from the leaps and plunges of your 401(k) account, brace yourself. The market's gyrations aren't likely to slow anytime soon.

One reason: Historically speaking, volatility was unusually low from 2002 through most of 2007, says Russ Koesterich, head of investment strategy at Barclays Global Investors.

"Money was cheap and plentiful, and in that type of environment, volatility is usually low," Koesterich says. The market is returning to more normal levels of volatility now.

There are plenty of factors out there to give the stock market the jitters. Start with the credit crunch, which triggered the Fed rate cuts and stirred the volatility pot. Worries about subprime mortgage defaults spread to the stock market, triggering a 3% drop in the S&P 500 on Aug. 9 and a 2.5% gain the next week, when the Federal Reserve lowered its discount rate to 5.75%.

But on Aug. 28, the market plunged 2.4% on fears that the Fed wouldn't lower the federal funds rate. On Sept. 18, the market threw a party for the Fed's rate-cut announcement, soaring nearly 3% its largest one-day gain all year.

Other factors that could send the stock market sharply up or down over the next few months:

The dollar. The greenback has taken a pounding on international currency markets. The trade-weighted dollar index, which measures the dollar's value against the largest U.S. trading partners, has fallen 6.2% since June. Measured against the euro, though, the dollar has tumbled 10%. It's now slightly weaker than the Canadian dollar for the first time since 1977.