Why the recent rise in volatility is consistent with past cycles
4 must-read takeaways from the recent volatility spike (Part 3 of 7)
While no factor alone is responsible for the changed environment, I believe the pickup in volatility is reasonable in light of diminished expectations for global growth and less benign credit markets.
Historically, big drivers of financial market volatility have been forward looking economic conditions, credit conditions and market momentum, all of which have deteriorated over the past two months. To the extent that momentum has declined, investors expect less robust growth, and credit conditions—while still easy—are less benign than several months ago.
Market Realist – The graph above shows how the IMF has downgraded its economic outlook for world growth from 3.4% to 3.3% for 2014 and from 4% to 3.8% for 2015.
Though the U.S. economy is on a path of recovery, recessionary trends have sprung up in other parts of the world. The Eurozone (EZU) is suffering from a severe slowdown. The growth rate for its gross domestic product, or GDP, in the second quarter came in at 0%, indicating a complete stall.
Japan (EWJ) is reeling from a slowdown. The consumption tax it imposed in April caused a slowdown in the economy, with Japan’s GDP growth rate coming in at -0.8% for the second quarter.
China (FXI) has faltered on concerns of a slowing manufacturing sector. The manufacturing purchasing managers’ index for China declined from 51.7 in July to 51.1 in September, while the non-manufacturing PMI dropped to 54.0 in September from 54.4 in August.
The slowing growth in global markets (QWLD) could be a major factor for rising volatility (VXX).
Market Realist – The graph above shows the Chicago Fed’s National Financial Conditions Index (or NFCI). The NFCI is an indicator of the credit market conditions prevailing in the U.S. economy. A positive number indicates tighter-than-average conditions, while easy conditions correlate with a negative number. Though the current market conditions are easy by historical standards, NFCI levels have been increasing in the past two months.
Read on to the next part of this series for key takeaways for investors as volatility starts to increase.
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