Stock Market Volatility: What It Is and How It May Affect Your Investments

Price movements of any kind can be unsettling, but a market decline is just never a good feeling. We hear you, and we’re in it with you.

However, a volatile market is par for the course when it comes to investing. And remember, the market has to go down sometimes in order to come back up.

So, what is market volatility and how should you deal with it? Let’s break it down.

What is stock market volatility?

Stock market volatility is a measure of how much the investable stock market fluctuates up or down. When investors talk about stock market volatility, it’s usually in reference to a specific stock index (e.g., the S&P 500 or the NASDAQ) or a particular geography (e.g., the U.S. or Canadian market). When the market is volatile, it is showing higher-than-usual movement. 

Stock market volatility creates uncertainty for stocks held by investors, called market risk. This is the unavoidable fluctuations in your investments caused by the broader market’s moves. 

All stocks have market risk, regardless of how sound their fundamentals may be. For example, a bad stock market crash is likely to affect even blue-chip stocks with solid balance sheets and cash flows. 

How is market volatility measured?

Stock market volatility is primarily measured by the Chicago Board Options Exchange’s (CBOE) Volatility Index, otherwise known as the VIX. At any given time, the current VIX index value reflects the expected annualized change in the S&P 500 index over the following 30 days, based on options data. 

Colloquially, the VIX is known as “Wall Street’s Fear Index.” A sudden spike in the VIX is a sign of high current market volatility and is almost always accompanied by a drop in the S&P 500 Index. This makes the VIX a good indicator of current and expected market volatility. 

Market volatility can also be measured by the standard deviation of various indexes. This metric reflects the average amount the value of an index has moved around the mean over a period of time, such as one, three, five, and ten years. A volatile index such as the NASDAQ 100 is likely to have a higher standard deviation, as its value will fluctuate more compared to historical volatility averages. 

Finally, market volatility can be measured by comparing the beta of various individual stocks. Beta measures a specific stock’s sensitivity and direction relative to the overall market (usually a market in the same geography as the stock, such as the S&P/TSX Composite for Canadian stocks). The market always has a beta of 1.00, and stocks can have a beta of:

• Greater than 1.00 (moves in the same direction as the market and with more sensitivity)
  
• Less than 1.00, but greater than 0 (moves in the same direction as the market, but with less sensitivity) 
  
• Less than 0 (moves in the opposite direction to the market)

What causes stock market volatility?

Market volatility reflects market reactions to a range of factors, including economic data, corporate earnings, geopolitical events, and shifts in investor sentiment. Understanding these influences is crucial for managing risk and making informed investment decisions. During volatile periods, market opportunities and risks become more apparent as investor emotions can drive significant price swings. Several factors can cause volatility in the stock market, including:

1. Economic Indicators: Reports on employment, GDP growth, inflation, and other economic indicators can influence market expectations and cause price fluctuations.
2. Interest Rates: Changes in interest rates by central banks can affect market volatility. For example, an unexpected rate hike might increase volatility as investors adjust their expectations.
3. Corporate Earnings: Quarterly earnings reports from major companies can lead to volatility, especially if the results are significantly different from analysts’ expectations.
4. Geopolitical Events: Political instability, wars, or other geopolitical events can create uncertainty and lead to increased market volatility.
5. Market Sentiment: Investor sentiment and behavior, often influenced by news and media, can drive market trends and create volatility, especially during speculative bubbles or crashes.
6. Liquidity: Markets with lower liquidity can experience higher volatility, as fewer trades can lead to larger price swings.
7. Regulatory Changes: Announcements of new regulations or changes to existing financial laws can cause market reactions, sometimes leading to heightened volatility.
8. Global Events: Events such as natural disasters, pandemics, or significant international economic shifts can also lead to increased market volatility.

What is causing the recent stock market volatility?

Market volatility in 2024 and 2025 has been high, thanks to a number of events:

1. U.S. Tariffs on Canadian Goods: In the past few months, the U.S. imposed new tariffs on Canadian softwood lumber, aluminum, auto parts, and select agricultural products, citing unfair trade practices. These measures strained cross-border trade and prompted Canadian counteractions, heightening economic uncertainty in key export sectors.
2. Inflation Trends: Persistent inflation continues to make headlines in 2025. Inflationary pressures are still being closely monitored by both politicians and central banks.
3. Interest Rate Fluctuations: The Bank of Canada made several adjustments to interest rates in response to changing economic indicators, which caused fluctuations in market sentiment and stock prices.
4. Major Earnings Reports: Companies with significant operations in Canada, such as Shopify, faced mixed earnings reports throughout 2024. Some sectors recovered strongly, while others struggled, leading to overall market volatility.
5. Natural Disasters: Canada experienced several natural disasters in 2024 and into 2025, such as wildfires, floods and hailstorms, which affected certain regional economies and influenced market sectors related to insurance, energy, and resources.
6. International Trade Tensions: Trade negotiations between Canada and major partners like the United States, China, and the EU occasionally became strained, impacting sectors reliant on exports and imports.
7. Technological Advancements and Cybersecurity Concerns: Advances and disruptions in technology, including increased incidences of cybersecurity threats, caused fluctuations within the tech sector. New regulations regarding AI and data privacy were also recently announced.
8. Election Cycles: The Canadian federal election in 2025 added a layer of uncertainty as politicians debated economic strategies, impacting investor confidence and market performance.

Why does stock market volatility change over time?

Market volatility is considered to be a mean-reverting phenomenon. This means that while there may be periods where the market experiences high levels of volatility, over time, this volatility tends to settle back down to its historical average. The primary reason for this behavior is that the events which drive market volatility are often temporary or cyclical in nature.

Events Driving Volatility Spikes

Events such as geopolitical tensions, economic data releases, changes in interest rates, corporate earnings announcements, and significant technological advancements can all lead to spikes in volatility. However, once the market has digested the implications of these events—essentially having “priced them in”—the level of uncertainty diminishes. As a result, market participants, including investors and traders, will typically resume their usual activities and investment strategies, leading to a reduction in volatility levels until the next impactful event arises.

The Cyclical Nature of Volatility

It’s important to understand that volatility will inherently ebb and flow throughout various market cycles. This cyclical pattern means that periods of heightened volatility are eventually followed by calmer periods. Therefore, trying to predict or time these fluctuations can be extremely challenging. While some investors attempt to profit by betting on volatility—either by shorting it during calm periods or going long during volatile times—many of these attempts have led to substantial losses.

Long-term Strategies Amid Volatility

Given the unpredictable nature of market volatility, long-term investors are often better served by maintaining a well-diversified portfolio and adhering to their investment strategy, rather than attempting to time the market. By accepting that volatility is an inherent part of stock market investing, and focusing on long-term goals, investors can mitigate the risks associated with short-term market fluctuations and ultimately enhance their potential for success over time.

How to deal with market volatility 

Stock market volatility can be upsetting for many new investors to deal with. Seeing your portfolio value fluctuate day over day can be a significant source of stress, even if your investment choices are sound. Here are some tips on how to cope with market volatility.

1. Tilt your portfolio to less market-sensitive investments

An asset allocation to low-beta large-cap stocks with a lower standard deviation might be a good idea for investors looking to minimize the effects of market volatility. Historically, stocks from the health care, consumer staples, and utilities sectors have low beta, meaning they’re less sensitive to price volatility. This translates to lower sensitivity to the market’s movements and less volatility. Investors can use various stock screeners to find these.

2. Ensure you have a sufficient allocation to bonds 

As a fixed income instrument, bonds have a much lower correlation to the stock market. In general, they tend to be lower risk, lower return investments. This makes an asset allocation to investment-grade (BBB, A, AA, AAA) bonds a good option when it comes to reducing volatility. 

Some bonds like U.S. Treasuries can even gain value during bad crashes as interest rates drop and a “flight to quality” occurs. Common allocations to bonds include 10%, 20%, and 40%, depending on an investor’s risk tolerance. 

3. Stay the course for the long term

Often the best investment strategy is maintaining a long-term perspective and accepting the current market volatility. If your investment objectives are years or decades away, it can be helpful to remember that volatility is a mean-reverting phenomenon and poor market conditions won’t last forever. 

Consistently contributing to a well-diversified portfolio of high-quality stocks can set investors up for success in the long run, no matter how volatile the market is at the moment.