The last few weeks has seen a nasty wobble in global markets. This has been blamed on China in general and the Federal Reserve in the US in particular.
When the market goes down everyone wants to know who did it. When it goes up people look to themselves to take the credit for their profits, so few explanations are required.
Investors should bear in mind that the market doesn’t need a reason to go down. It jiggles about from minute to minute, day to day, month to month. They don’t realise that these random jiggles vary in size and the size varies with time. This is the basic personality of volatility and the random processes that drive the way the markets move.
If a stock moves 1 per cent on an average day you can expect a couple of 10 per cent moves a year. Given enough time that stock is likely to move 20-30 per cent on a day.
You might look at the news and point out reasons but there doesn’t need to be one; random events unfold that way. Every few million years a giant meteor shows up and makes a nasty mess but this is just a giant one in a range that lands all the time. Meteors or market crashes, as time passes, the size of the biggest grows. At some point the market will slump or zoom, crash or boom, it doesn’t need a villain to be responsible.
No one is happy to hear, “the market slumped today because of the stochastic consequences of the random walk,” people want to lay the blame at someone’s door. That blame in the current narrative is carried by either China or America and as the number one and two economies that makes for a solid guess.
There is the worry that China has overextended its economy and is about to suffer a credit crunch and crash. Less exciting is the possibility that Chinese New Year and the tradition of settling accounts created a liquidity drain around the world. Consequently, Chinese cash reserves held in global investments were drawn down causing a down draft of selling.
China will stay a dark cloud hanging over the markets. At the same time, the Federal Reserve is slowing its money printing. Everyone is worried about that, as any tramp fearing the loss of his free lunch would be. But tapering is not tightening. The hobo is not going to lose his free plate of stew, he will just get less.
It is the beginning of the end for QE but it is likely to be around inflating the world economy for some time to come. US QE should still drive asset prices or at least support them for a long time to come. The whole point of “the taper” is to match a general recovery, so it shouldn’t cause a bust.
As such, 2014 should be a year of volatility with less rampant bullishness than in 2013. Instead we should get a lot more of the random slumps and rallies like we are going through now and end up not so much further ahead by 2015.
People forget the volatility before the crash of 2007. The kind of unexpected rises and falls we’ve ridden in the last few months are a sign we are returning to the pre-crash normality we’ve all been hoping for.
It is often said we should be careful what we wish for because we might get it and increasingly going forwards we will be living in a world reminiscent of the pre-crash days of 2007-2008. For stock investors in the US and Europe, however, 2009 till now were the best of times.
The writer is CEO of ADVFN.com, a financial stocks and shares information site, and author of 101 Ways to Pick Stock Market Winners. Opinion expressed here is his own and does not reflect that of Gulf News.
