You're Not Imagining That Queasy Feeling: Market's Volatility Soars

On gut-wrenching days like we've had lately, one of the few things you can be sure of is that somebody will point out how, in absolute terms, things are not so bad.

Bring up Monday's 349-point decline in the Nasdaq Composite Index, and one of these helpful souls will point out that, in percentage terms, Aug. 31, 1998 was worse. Talk about Tuesday's whiplashing, and you'll be reminded that it's nothing compared with the Oct. 28, 1997 snapback. The message? Things Aren't As Bad As You Think.

If, despite all this comforting, you still feel the market is rocking like never before, there's a reason: It is. Historical, or real, market volatility has been trending higher since the mid-1990s. And it doesn't look like it's going to get any better.

You Can Still See and Walk

One big reason the market's begun to hop around so much is that its makeup is now so different. In 1995, when volatility was at its nadir, tech stocks made up less than 10% of the S&P 500. Now they make up about 33% of that index. (Fun fact: Some consider the S&P underweight in tech, because technology's weight in the overall U.S. stock market is something north of 40%.) Because these quick-growing companies are priced on what investors expect them to earn years from now, they carry very high price-to-earnings multiples. And because of those very high multiples, incremental changes in a company's outlook can mean huge changes in price, hence, more volatility. ...