Peaks and Troughs: What does the volatility in the stock market mean for us?

Ruth Cunningham explores what a newly restored volatility in the stock markets could mean for the global economy 

Stocks on Wall Street climbed once again on this week in the wake of several turbulent days of trading.

Last Monday afternoon, the Dow Jones industrial average – that is, a stock market index of thirty major companies – experienced its most significant single-day point drop since the fallout following the collapse of Lehman Brothers in the midst of the financial crisis in 2008.

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The scare saw the industrial average plunge almost 1,600 points during market hours before recovering to close down 1,175.

The markets fought back on Tuesday closing up 576 points, leading to a rise of 2.3 per cent. By closing of trading on Monday 12, markets lay at a 9 percent decrease from their all time high at the end of January. An improvement no doubt – but not much consolation.

Since President Donald Trump’s election, the Dow has rocketed over 40 percent.

In the same period, the Standard & Poor’s 500 (S&P 500) which tracks the 500 largest companies listed on the New York Stock Exchange or NASDAQ, rose over 20 percent.

Michael Yoshikami, CEO of Destination Wealth Management told CNBC that “the market simply did not take into account that you can’t go up like this that long”.

This return to volatile market activity following a period of stability has caused concern about what this may mean for the global markets impacted by the slightest disruption in the world’s largest economy.

Despite initial chaos, experienced traders and financial experts dismissed the drop as insignificant and unlikely to be a warning sign of failing markets.

Art Cashin, UBS director of floor operations at the New York Stock Exchange suggested that the market is attempting to bottom out.

Speaking on CNBC Cashin said: “Markets remain thin and they remain volatile. Quite frankly, after doing this for 50 years, that’s just what you need for a bottoming process to succeed”.

In layman’s terms, when a stock bottoms out, it has reached its low point and is likely in the early stages of an upward trend. The only way is up, so to speak.

Others in the field are not so optimistic about the likelihood of a market that is potentially upticking. Former Chief Treasurer at AIB Jillian Mahon refers to what is known in trading as the ‘dead cat bounces’ effect. Playing off the idea that even a dead cat will bounce if it falls far and fast enough, the effect describes a temporary market recovery from a prolonged decline.

Mahon said “traders across global markets must be considering the question as to whether the soft recovery in prices being experienced by stock markets is a ‘dead cat bounce’ before stocks resume a further downward price correction or whether the positive economic sentiment and generally buoyant data can continue to underpin the heady levels seen in late 2017.”

“After initial concern about Trumpian politics early last year, US markets shrugged off caution and bought into the lower taxes and higher growth rhetoric. This pressed the stock markets up 40 percent in a straight line trajectory”.

“This leaves the market vulnerable to shocks. This volatility may not turn out to be the beginning of a stock market slump, rising bond yields, inflationary trends or a recession.  However, having lived as a trader through Black Monday 1987, the pound sterling leaving the European Exchange Rate Mechanism (ERM) in 1992, European Bond market crises pre Euro and extended crises 2008-12, I recognise more than a pricing correction – it is a return to volatility and sensitivity to political and economic news.“

If economists and financial experts were ever able to agree on what the current state of the market says about our economies, we likely could have avoided a substantial proportion of economic crises worldwide. Naturally, this is not the case and is no different in this particular situation. The key market figures seem to indicate that the US economy is healthy but often stocks are a numbers game we are only ever capable of calculating with the benefit of hindsight.

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