Why are the markets so volatile?
Photo: Phoebe Tengdin. Used by permission.
Happy markets are all alike. Each unhappy market is unhappy in its own way.
It started with a dispute between the Fed and the Administration. Like every first-term president since Harry Truman, Donald Trump wants lower interest rates. And he wants them now. Lower interest rates will improve the short term performance of the economy and help his chances for reelection.
The Fed has its own institutional priorities. They want to maintain their credibility. In the words of a deceased Game of Thrones character, they want the freedom to make their own mistakes. So when they agreed to cut rates – with two hawkish dissenters, the conventional maximum – Jay Powell signaled that they hoped it would be “one-and-done.” The administration spooked the market with more trade saber-rattling to the Fed’s hand. China responded with their own sabre: the potential to devalue their currency and further disrupt global markets.
China’s currency devaluation took most observers by surprise. They’ve held the Yuan steady through several successive crises: the Asian Contagion in 1998, the Financial Crisis of 2008, and their own market melt-ups and melt-downs in the ‘teens. Chinese authorities want Yuan to be part of global capital flows, but they also want to signal that they have something that Donald Trump wants: the key to financial market stability.
All this is happening during the dog-days of August. Head traders and senior hedge fund managers are hanging out in the Hamptons or para-sailing in the Swiss Alps. They’re not on hand to identify which dogs to sell and which puppies to pick up on the cheap. Crowded beaches and remote mountains often have poor cell-phone reception, which can make it hard to direct junior staff – who are junior for a reason.
Taken together, these factors led to yesterday’s massive sell-off. Many wonder if this will be a summer swoon, similar to August 2015.
What happens next is anyone’s guess. In the short-run, the market will be jumpy. There may be liquidity pressures from ETF liquidations. Volatility breeds volatility. In the long run, though, the stock market will rise when economies and corporate earnings grow. There’s no magic to markets, just a lot of flows and ebbs and eddies and cross-currents. Reading those flows can be like reading turbulent air currents.
One thing is certain: six months after the market turns, everyone will say it was obvious.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”