Strategists have been clamouring over themselves on CNBC to explain recent market volatility, but reasons differ greatly depending on who is being interviewed.
It's not the strategists' fault, as this is actually a symptom of an even bigger problem. In the era of 24-hour financial news services that we've become accustomed to, everyone demands to know what is the exact cause of price action. Simple explanations like there were more sellers than buyers don't cut it. That's nothing new, but the desire to know what's driving market movements down to the hour is. The unfortunate and unsatisfying reality is that drivers are often many and not all that clear in real time.
Since December, there hasn't been one single reason market volatility has picked up, but numerous. If you put all of these pieces together like a jigsaw puzzle, the picture becomes clearer. We'll address here some of the reasons why markets are behaving as they are. Keep in mind it's not due to one of these catalysts, but all of them, and each to varying degrees. In no order of importance, the catalysts are: the Peoples Bank of China (PBOC) devaluing the yuan in August, overseas growth concerns, crude oil weakness and the U.S. Federal Reserve increasing interest rates.
The PBOC did a one shot devaluation of the yuan in August, but the market didn't believe in the one-time narrative. Global currency markets feared more devaluing, which would lead to capital outflows and other countries following suit, eventually resulting in a currency war. When foreign exchange volatility heats up it tends to leak into other financial markets, and this time was no different.
Speaking of China, the country has stated its intention to step away from its debt fuelled investment boom, which means there is less demand for things like copper. This has led to weakness throughout commodity complex and resulted in a slow-down in emerging markets, as many of these countries are net exporters.
Crude oil is part of that commodity weakness. As many have noticed, markets have been moving in lockstep with crude oil. But, this is not the case historically, as lower crude prices are typically good for the U.S. This is because consumer spending accounts for 70 per cent of the economy and the country is a net importer. Lower gasoline prices are a tax break across the board, which, as my economics 101 textbook tells me, is a good thing. We've seen the negative part of low oil prices show up in the manufacturing sector and corporate earnings, but we've yet to see the positive impact. This is because gasoline savings typically translate into higher consumer spending after the fact, as consumers want to see that the lower gasoline prices are long-lasting.
The Fed raised rates for the first time in almost a decade in December. Historically, what we see in the three months after the Fed begins to tighten are markets pull back and volatility pick up. This is because higher interest rates get priced in immediately, but the reason for the increase - an improving economy - gets discounted by the markets more gradually.
Everyone wants to know what's wrong with the market, but nothing's wrong with the market. This is business as usual and increased volatility at this point in the cycle is not uncommon, even in bull markets. When markets turn negative, bad news gets blown out of proportion and good news gets ignored. This always happens and if you're looking for things to worry about, you'll find it. But, as the old Wall Street adage goes - the market loves to climb a wall of worry.
Lori Pinkowski is a senior portfolio manager and senior vice-president, Private Client Group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Past performance is not necessarily indicative of future performance. Lori can answer any questions at 604-915-LORI or lori.pinkowski@raymondjames. ca. Listen to her every Monday morning on CKNW at 8:40 a.m.
