With the arrival of a new year, a feeling of optimism naturally permeates the air. However, for people who had money invested in the markets it was a challenge in January to stay optimistic. The entire month was an unpredictable ride; major swings to the positive and negative sides took place on a weekly basis. What was the cause of all this stock market volatility? Well, actually, more than one disruptor was behind the turmoil.
Market volatility reason #1: The devaluation of the stock market in China
For years, financial analysts in Europe and North America have speculated that stock prices in China were inflated. Over the last few months, the market decided they were right. Couple the sentiment of the analysts with the devaluation of the Chinese currency, and the result was a 25% drop in the value of the Shanghai Exchange.
Market volatility reason #2: Distrust of the Chinese GDP number
The legitimacy of the numbers associated with China’s economic growth has long been questioned. That distrust was fueled even further in January when the Chinese government reported that the country’s gross domestic product (GDP) grew by 6.8%. Meanwhile, seasoned market watchers were suggesting Chinese growth could be as low as 2.4%. Such a large discrepancy between the two caused many to question the accuracy of the Chinese number; as a result, stock markets worldwide went into a tailspin.
Market volatility reason #3: Automated computer trading
The selling and buying of stocks is no longer transacted by frenzied traders in loud jackets on the stock market floor. Computers now tend to a large proportion of these tasks. The computers are programmed with algorithms that trigger buy and sell orders when certain price levels are reached. When markets experience wild swings, the algorithms are triggered more frequently, the number of trades escalates and the perception of even greater stock market volatility is created.
Market volatility reason #4: Price of oil
The Organization of Petroleum Exporting Countries (OPEC) reiterated that its members are not going to curb their production of oil despite the current glut on the market, but that hasn’t stopped the price of oil from bouncing up and down. The market is so desperate for an oil price recovery that any news will spark a sudden uptick. Case in point: in January, there was a rumour that the Saudis and Russians were going to reduce production. As well, there was a report that claimed North America was in for a colder winter than last year. Both of these conjectures caused the oil price and the markets to rise, only to decline soon after.
Market volatility reason #5: Interest rates
In the US, the Federal Reserve decided not to raise interest rates in January, which was the opposite move from what market watchers had predicted it would do. In Canada the expectation was that the Bank of Canada would lower interest rates, which it didn’t do. Both of these surprise announcements caught market watchers off guard and, as a result, caused stock market volatility.
All five of these reasons have one thing in common: they represent uncertainty. The one thing that markets dislike the most is uncertainty. The bottom line: the higher the level of uncertainty, the higher the level of market volatility.
Here’s to a more certain 2016 going forward.