Volatility Strikes Back

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What's going on?

Stocks around the world shed all of the past months gains on Monday with 7% wiped off the value of the US stock market in just two trading days. (tweet this)

What does this mean?

Stock prices had been on a historic tear, tramping upwards through most of 2017 before accelerating in January. At the same time, volatility which measures how dramatically stock prices move fell to unprecedented lows. In other words, it was generally a slow and steady grind higher for most of the past 18 months.


But things have now changed in heart-stopping fashion. No catalyst was immediately apparent, although last weeks bond market selloff appeared to contribute to the initial weakness in stocks.

Why should I care?

For markets: The huge increase in volatility is costing some investors lots of money and endangering the wider market.

A popular investment over the past year or so has been to sell volatility, which means that investors make money when markets are calm a winning trade until recently. This strategy has been packaged into easy-to-trade exchange-traded notes, which make buying into the strategy as simple as buying a stock. Those investments were down almost 90% on Monday alone, as volatility increased by its largest-ever amount. One fear is that losses from those popular trades could force investors to raise cash by selling other investments, thus pushing down stock prices further in the very near term.


The bigger picture: The outlook for the overall economy hasnt changed yet.

The good news is that the global economy is in no worse shape, fundamentally, than it was two weeks ago, when synchronized global growth was a major justification for record-high stock prices. There are still lots of reasons to be positive! If the market selloff gets a lot worse, however, there is a risk that itll dent consumer and business confidence, leading to a slowdown in spending and then the wider economy will start hurting.

Originally posted as part of the Finimize daily email.

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