The View

Stock market volatility may spook some investors, but it is no prelude to a crash

Nicholas Spiro says conditions causing the volatility are not uniformly bearish, and there’s disagreement even among investors themselves of the market direction

Outlook for the US economy and corporate earnings remains strong

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An investor looks at stock price movements on a screen at a securities company in Beijing on October 12. Despite the sharp falls in asset prices in China over the past several months, investors continue to differentiate between the current sell-offs and previous crisis in 2015-16. Photo: AFP

Nicholas Spiro is a partner at Lauressa Advisory, a specialist London-based real estate and macroeconomic advisory firm.

Published: 3:15pm, 22 Oct 2018Updated: 10:29pm, 22 Oct 2018

It has been a turbulent year for financial markets. But October has proved a particularly volatile month.

In the space of eight trading sessions, the benchmark S&P 500 equity index experienced a daily move of 1 per cent or more five times. Last Tuesday, the gauge surged 2.2 per cent – its biggest gain since March – only to lose 1.4 per cent on Thursday. The day-to-day swings stem from a confluence of global risks that are weighing on sentiment, causing the S&P 500 to suffer its worst October start since 2008, according to data from Bloomberg.

The reasons for investors to be bearish are piling up. Last week, the Shanghai Composite Index sank to a four-year low as third-quarter gross domestic product data revealed that China’s economy expanded at its weakest pace since 2009. This prompted three of the country’s financial regulators to issue statements designed to calm markets, in an ominous echo of Beijing’s previous unsuccessful attempts to stem the rout in stocks in 2015.

In another eerie reminder of previous financial crises, a bitter stand-off between Italy’s new populist government and the European Commission over the country’s draft budget – which envisages a major increase in the fiscal deficit despite Italy’s dangerously high level of public debt – has caused the spread, or risk premium, between Italy’s 10-year bond yield and its German equivalent to surge to its highest level since the end of the euro-zone debt crisis in early 2013.

Investors are also fretting about the rise in global borrowing costs. The three-month US dollar Libor rate, one of the word’s most important interest rates, increased to a 10-year high last week, driven up by expectations of tighter US monetary policy. Also on investors’ minds are the sell-off in popular technology shares, the threat of a no-deal Brexit, and the fallout from America’s ongoing trade dispute with China.

Stock market volatility may spook some investors, but it is no prelude to a crash

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