How Uncertainty Affects Investor Perceptions

What is volatility? In technical terms it means standard deviation – the dispersion of a data set relative to its mean – but, to the average investor, volatility simply means how much the stock market (or any market) moves up and down. After a historically low-volatility year in 2017, volatility ramped up in 2018 primarily due to US-China trade tensions. Sixty-four trading days in 2018 were +/- 1 per cent – half rose more than 1 per cent and half fell more than 1 per cent. So far in 2019, uncertainty surrounding global growth, US-China trade tensions, recession fears and geopolitics have caused bouts of market volatility that have left investors with vertigo.

Market volatility feels worse this year than it did last year – but is it really worse? We have compared the number of +/- 1 percent moves of the S&P 500 year to date, and find that they are in fact within expected ranges. Though the S&P 500 is still up over 18 per cent since January, the higher level of global uncertainty has made the volatility “feel” worse to investors. Yes, global economic and geopolitical uncertainty has increased in 2019, driven primarily by continuing US-China trade tensions. However, on the flip side, global central banks have initiated a broad easing cycle in an effort to counteract slowing growth. China has implemented dozens of measures – such as lower borrowing rates, currency depreciation and higher liquidity – while the European Central Bank has also laid out plans for additional stimulus. Weakness in Germany has driven the historically fiscally conservative country to acknowledge the importance of both structural reform and stimulus measures.

Looking ahead, we believe that global growth will continue to decelerate but remain positive. We do not foresee a recession over the next 12 months, but we are closely monitoring the risks to this outlook. Reeling investors should bear in mind that not all economic risks are to the downside: progress on the trade front or global easing feeding through to stronger growth have the power to drive both economies and markets higher.

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From Chief Investment Officer, Jack Ablin.
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