Market volatility has emerged after a prolonged stretch of quiet.
Since the start of 2018, turbulence in stocks, bonds, commodities and currencies has increased—a distinct shift from last year, when calm dominated markets.
The Dow Jones Industrial Average tumbled more than 650 points Friday, capping its worst week since January 2016. A measure of expected stock volatility dubbed the Cboe Volatility Index, or VIX, jumped to 17.31 and settled at its highest level since November 2016, a time when jitters surrounding the U.S. presidential election roiled markets.
A yardstick of Treasury market volatility climbed to a six-month high Thursday, Thomson Reuters data show, while a gauge tracking currency swings has also risen sharply.
“This should be a wake-up call for investors,” said Sameer Samana, global equity and technical strategist at Wells Fargo Investment Institute in St. Louis.
The resurgence of volatility could create problems for some who have become accustomed to muted moves in prices.
For instance, the recent turbulence was a blow to the wildly popular short volatility trade, in which investors bet on stocks to remain subdued through exchange-traded products or derivatives. The trade got crushed in January for the first time in months.
Of the investors betting against volatility, “those people are getting hurt. There’s no doubt about that,” said Jerry Lucas, a New York-based managing director at UBS Wealth Management.
Friday’s moves come after a period of tumult that started in January. During the month, a measure of stock volatility jumped even as the S&P 500 climbed more than 5%–a development that hasn’t happened to that degree in 14 years.
One of the biggest changes that has sparked this bout of volatility has been in interest rates. The yield on Treasurys maturing in two years hit the highest level in almost a decade on Thursday, as signs of inflation have started to creep up after years of price gains being subdued.
Higher rates spell potential bad news for stocks and emerging markets. Stock dividends compete with bond yields as income for investors, while rising interest rates usually portend higher borrowing costs for developing economies.
It also means the U.S. Federal Reserve may tighten monetary policy at a faster clip. Penn Mutual Asset Management’s Zhiwei Ren warned that that would ripple across markets.
Signs of economic growth raise the stakes for the Fed’s every move, Mr. Ren said, making the potential for missteps greater. How to manage a more heated economy is “a more challenging task for the Federal Reserve,” he said. This “justifies higher volatility.”
The jump in turbulence comes after stock markets have been on an extended tear. The S&P 500 posted in January its longest streak of monthly gains in almost six decades. Ten-year Treasurys just finished the most tranquil year in almost four decades as yields remained low, keeping bond prices high.
“That kind of market is coming to an end,” said Mr. Ren, a portfolio manager at Penn Mutual. “People are starting to realize that the fundamentals are changing.”
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com