Recently, high market volatility resulted from concerns about uneven global growth and political events in Japan and Greece. We anticipate investor angst to stay high for the rest of 2015.
Stocks and other risky assets have experienced more volatility this year, and given uneven global growth and the impending tightening of U.S. monetary conditions, I think we are likely to see more turbulence ahead. As I discuss in my weekly commentary, there are two forces driving the volatility.
Market Realist – Why are stock markets choppy?
The stock markets have been quite choppy this year, due to various factors. One of the main reasons causing stock market volatility (VXX) across the board is soft global growth.
The graph above compares the performance of the S&P 500 (SPY)(IVV) with emerging market stocks (EEM), as tracked by the MSCI Emerging Markets Index and the MSCI EAFE Index (EFA), which tracks developed markets outside of the United States and Canada. They have given returns of -0.9%, -1.4%, and 1.9%, respectively, year-to-date or YTD.
The graph indicates that stock markets have been volatile this year. Out of the three indexes stated above, only the developed market index has given positive returns so far this year. This is because Europe (EZU) and Japan (EWJ) are seeing excess liquidity through quantitative easing (or QE), which is supporting their respective stock markets.
Back home in the United States, while earnings season delivered better-than-expected results, the stock markets are facing many headwinds. The strong dollar makes US exports unattractive, which is a negative for exporters. Also, while the stocks aren’t in bubble territory, they’re not cheap either, and they’ve factored in a lot of expectations. In the short term, the probability of the Fed hiking its interest rate as early as June is making investors wary.