Macro Concerns Drive Volatility

Terry Flanagan

Continuing macroeconomic issues will bring about continued volatility.

With the market tumult continuing amid economic concerns and declining investor confidence, volatility looks to become the norm for the foreseeable future.

“There is significant interconnectedness in the world, what’s happening in Europe is playing a bigger role than it did even 10 years ago,” said Timothy Hurley, managing director of Bentley Associates, a New York investment banking firm. “When you see Italy downgraded, the French banks which today were downgraded, riots in the street in Athens, everyone starts thinking wheels are coming off in Europe. I think Europe will continue to have an adverse effect on the U.S. markets. We’re in for a mediocre market here for the next few months at least.”

The most recent surge in volatility came as investors reacted to news of the Federal Reserve looking to drive down interest rates, which has been dubbed by some as “Operation Twist,” as well as prospects of slowing economic growth, weak consumer confidence, increasing unemployment, and the ongoing uncertainty in Europe.

The Chicago Board Options Exchange’s Market Volatility Index, or VIX, has been on a wild ride in recent weeks, rising from about 18 in late-July to as high as 48 on Aug. 8, as the markets reacted to the debt ceiling situation and the Standard & Poor’s downgrade of U.S. debt. It then hovered around the mid-30s for the following weeks. The last time the VIX was under 30 was Aug. 3. As of Sept. 22, it has been trading over the 40 mark again. The VIX, also known as Wall Street’s “fear gauge,” measures the implied volatility of the S&P 500 index.

“A little volatility is good, because at least you can discern a trend with lower volatility,” said Hurley. “For a couple of days recently the Dow has shifted by 500 points up or down. Then everyone starts thinking market is less of an investment vehicle and more of a “crap shoot.” Some volatility is expected, it’s when you get these substantial big swings that it’s troublesome.”

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