Putting market volatility in perspective

Markets became more volatile last year and into the first month of 2019, but putting volatility in perspective—both historically and economically—might make the ride seem a lot less bumpy.

Since 1982, the average percentage of annual trading days where the S&P 500 moved more than 1% is about 50%, says AGF in a recent blog post. In particular, in 2002 and 2008, the index closed up or down by 1% in 90% of trading days.

In comparison, last year the percentage of days was only 44%, indicating that current volatility pales in comparison with the worst of times since 1982, says the AGF post.

Perhaps investors are being jolted awake after 2017’s volatility lull, with a mere 4% of trading days with comparable volatility.

But investors might want to put the brakes on overly negative sentiment. An economic outlook report from Scotiabank says signs of economic weakness shouldn’t be confused with signs that the expansion is about to stop.

For example, equity market movements suggest that investors expect a substantial markdown in growth ahead, including possibly a recession in some countries, says the Scotiabank report. “There is clearly a disconnect,” it says.

Some slowdown in growth is to be expected as central banks raise rates, says the report, which forecasts global growth of 3.5% this year, down from 3.7% in 2018. But markets have been particularly sensitive about the prospect of rates rising in the U.S., and fearful that the Federal Reserve will tighten the economy into a recession, as has happened in the past. In advanced economies, recession triggers have historically been oil price shocks and over-tightening by central banks, the report says.

Given that real policy rates in the U.S. are barely above zero and those in Canada are negative, fears of over-tightening are overblown. Instead, Scotiabank says the mostly likely trigger for a dramatic slowdown in global growth is the U.S.-China trade war, but, with talks between the two countries going well, this risk to the global outlook is waning.

In a 2019 economic outlook report from Deloitte, the firm urges businesses to continue to plan for the future despite expected slower growth, rebalancing of monetary policy by central banks and political uncertainty.

“Businesses shouldn’t let global uncertainty and the shift in growth sway them from planning, making decisions and investing in the future,” says Craig Alexander, chief economist at Deloitte Canada, in the release. “Business cycles are a normal part of economic experience. Waiting for risks to play out often means missing key opportunities.”

For Canada, Deloitte forecasts a growth rate of 1.6% in 2019 and 1.3% in 2020, down from about 2% in 2018, in part because of lower oil prices. The report describes these forecasted growth rates as sustainable.

For full details, read the Scotiabank report, the Deloitte report and the AGF blog post.