Markets don’t know whether to be afraid or to celebrate!

We are entering the age of stock market uncertainty

Article updated: 28 December 2018 12:00pm Author: Michael Baxter

This time around, the S&P 500 saw its biggest daily loss ever recorded on Christmas Eve. Two days later, it saw its best days trading in nigh on ten years. This was swiftly followed by one of the most volatile days of trading in years. It is as if the markets are confused; they have good reason. We are entering the age of stock market uncertainty.

Hollywood has long mastered the art of lulling us into a false sense of security — we expect to see the Alien, but instead it’s the cat, Jonesy. We breathe a sigh of relief, then the Alien appears, and its massive. Or, we laugh with the three men on board the Orca as they compare wounds. Then, a laughing Brody tips more fish into the sea as bait, only for the shark to rise from the water — ‘we’re gonna need a bigger boat’. Uncertainty is the key tool for keeping us on the edge of our seats. Stock market uncertainty is a tad more expensive — and the fear it creates lasts a lot longer.

For the movies, it’s about the music — duuuunnnn duun... duuunnnnnnnn dun dun dun dun dun dun dun dun dun dun dunnnnnnnnnnn dunnnn.

The stock market has got a different gauge of fear — it’s called the fear index, or VIX.
Back in 2017, the VIX index, which is a measure of volatility of the S&P 500, based on the standard deviation of its moving average, had never been so low. It frequently fell below a reading of ten — a level that it had only previously fallen below a handful of times since the index was created in 1990. In short, markets were like one of those mill ponds.

2018 was as different as you can imagine — the VIX peaked at 41 in February and surged again in the last week of December, hitting 35 on Boxing Day.

Oh, sure the index has been higher, but only during the period of the dotcom crash and the banking crisis of ten years ago.

The B-word
I am sorry, I am going to have to swear — Brexit! There said it. This rather vulgar B word illustrates the point. What will happen in 2019? No deal? Hard Brexit but with some side deals? Theresa May deal? A Norway deal? A second referendum — stay in the EU?

Do you see what I mean? I have no idea how this will turn out? It seems to me that the five above scenarios have equal chances of happening.

There is no Ridley Scott or Stephen Spielberg behind the scenes — we know at least one member of the crew will escape the Alien, and about half way in, we come to suspect it will be Sigourney Weaver. We know they will catch the shark and are pretty sure Brody will survive.

The US
We know why US stock prices fell in 2018. Stocks had risen into bubble territory. A bursting was inevitable.

It seems to me that the main speculation concerning the US revolves around the bite versus bark question. Is Trump’s bark worse than his bite? Well, we can now say he has every intention of carrying out every nasty, sick idea he promised during the US election.

Reagan told Gorbachev to tear down the wall. Not sure if he was knowingly quoting Pink Floyd. At a time when net migration from Mexico to the US is negative, Trump wants to build a wall, and he is willing to keep throwing his dummy far from the pram, creating a shut-down in US public services until he gets his own way.

He shows every intention of waging trade war and trying to bring down the institutions that were set-up post World War 2, as we learned the lessons from two world wars.

Those lessons are well and truly forgotten in some quarters.

And yet, sanity may prevail; on balance I think it will.

Interest rates
But interest rates matter. The reason why the 2008 crash was not followed by a 1930’s style Great Depression, was because of the banking bailout, record low rates and QE.

For pricing stocks, markets are supposed to discount projected future earnings by a certain interest rate to create a net current value. If interest rates are expected to be low, stock valuations will be high.
What will happen next?

If the Fed keeps raising rates, the falls seen in 2008 will continue. If inflation fails to rear its ugly head, and the Fed finds it can respond to the slowing economy by cutting rates again, crisis will be avoided.
Stock market uncertainty hinges on expectations of interest rates in 2019 and 2020.

In space, no one can hear you scream, but I am just not sure if it is safe to go back into the water — stock market uncertainty will persist for some time yet.

 These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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