What Has Driven Market Volitility?

January 22, 2019

The end of 2018 and beginning of 2019 were punctuated by market volatility.1 Over the 77 days between Oct. 9 and Dec. 24, 2018, the S&P 500 experienced a sharp pullback of almost 20 percent.2 Such an extreme decline is relatively rare, as are the volatility numbers from the CBOE Volatility Index (VIX) over that time, which were the highest since 2011.3

This begs the question – what drove market activity during this time?

If markets were bracing for an upcoming recession, a decline would typically transpire more gradually over longer periods of time – over multiple quarters as weakening data was being priced into stocks. So while we believe markets have now largely priced in a recession, we don’t believe that was the primary factor driving recent volatility.

Instead, it is more likely that something else was at play, such as the persistent trade and tariff fears that built up over 2018.

International markets, which outperformed in 2017, began underperforming in February 2018 with accelerating losses in April4 – about the same time the U.S. began to have well-publicized trade disagreements with China and other foreign countries.5 Eventually, progress was made between the U.S. and Canada, Mexico and various other countries6, which are traditional allies. But the dispute between the U.S. and China – the world’s two largest economies – still persists and has already caused damage to the global economy.

As the markets declined in the last few months of 2018, little to no progress was made in trade negotiations with China. Not only did U.S. primary markets drop approximately 20 percent2, but Chinese markets have fallen approximately 30 to 40 percent from peak levels in early 20187 and global economic numbers have slowed as well.8

Corporate reports have begun to indicate that companies would curtail research, development and capital expenditures while this economic uncertainty persisted.9 This news further spooked the markets because curtailing this spending will have a further slowing effect on global growth.

We believe declines occurred at the end of 2018 primarily as a response to the lack of progress in trade talks with China, the reduced economic growth that resulted from it and the prospect of companies sitting on the sidelines during the uncertainty. The good news is this combination of factors provides both the U.S. and especially China significant incentives to progress toward a trade resolution.

There are signs this is already happening as last month China indicated it was compiling the outline of a response to U.S. complaints.5 Politicians across the globe now recognize this dispute as a priority that must be resolved in order for economic growth to occur. Global markets will be watching this closely and will want to see actual, verifiable progress, and eventually a meaningful agreement.

China’s trading partners certainly have some valid complaints, and trade and regulatory issues in China is something that probably should have been addressed earlier. Working through these disagreements was always going to cause some market gyrations. And while we still have a lot of progress to make in 2019 and beyond, if 10 years from now we can look back and say a temporary market decline was the price we paid to resolve these crucial issues, we believe it will likely have been well worth it.


1. Los Angeles Times – The stock market’s severe drop: Normal pullback or an ominous sign?
2. Yahoo! Finance – S&P 500
3. Yahoo! Finance – CBOE Volatility Index
4. Business Insider – Global market indices
5. China Briefing – The US-China trade war: A timeline
6. Office of the United States Trade Representative – United States–Mexico–Canada Agreement
7. CNBC.com – Chinese markets’ 2018 performance was their worst in a decade
8. The Washington Post – Economic growth is slowing all around the world
9. MarketWatch – Trade tariffs mean companies will spend less on growing their business in 2019, says Fitch



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