The Market Calm Before the Storm
Wall Street has been remarkably quiet in recent weeks, which is especially surprising considering the turbulence that occurred just a few months ago. CNN reported on August 10 that the VIX volatility index had recently dropped below 11.4, reaching its lowest level since 2014. The index, which has rarely reached single digits, was sitting at almost 30 in September 2015. Although market declines are typical during August and September in most years, the current situation has many analysts wondering whether this is just the calm before the storm.
Is the Present State of the Market a Calm Before the Storm?
Some analysts theorize that it is possible that investors have been lulled into a false sense of security. The year has been punctuated by a string of all-time highs despite Brexit, plummeting oil prices and other market woes. Many analysts blame the Federal Reserve for the current state of affairs on Wall Street. In an article appearing on CNN.com, one investor described the Federal Reserve as playing “Pokemoney” without any clue about how to bring the game to an end. Most analysts believe that interest rates must rise and return to levels somewhat closer to normal.
Analyst Doug Wakefield noted that stocks rose on August 26 in anticipation of Janet Yellen’s speech. The market moved downward later in the day after Yellen did not announce the desired rate hike. However, in September 2016, Yellen hinted that the Fed would gradually increase rates although she stopped short of providing a timeline of any type. Most analysts believe that a rate hike is not likely to occur until after the presidential election.
Can the Fed Save the Market?
Prior to 2008, it was common for investors in many countries to believe that a central bank could assist the stock market. The idea became so ingrained in the public perception that many began to believe that the market could always be engineered to rebound if the Fed intervened. Technically, the Fed is not supposed to make market conditions the prime factor when deciding on rate hikes, but it seems that recently, whenever the market hiccups, the Fed appears to be hesitating. The problem is that the Fed does not have very many tools left if intervention becomes necessary due to a major downturn in the economy or the market.
Low Volatility Isn’t Always a Good Sign
Low volatility has often preceded a financial crisis, according to an article by the BBC. The article points out that low volatility was evident prior to the crash of 2007, the 1997 financial crisis in Asia and the Wall Street crash of 1929. The concern is that low volatility combined with low interest rates induce investors to take greater risks and incur more debt.
Other Nations Struggling With Market Issues Also
Americans need not feel lonely when it comes to the market and the central bank. In June 2016, analysts felt that the Asian markets were in a calm before a storm, according to an article posted on MarketWatch.com. China was the exception to the lull, which was due in large part to the fact that the Chinese government offers tremendous support to state-owned businesses.
Britain’s vote to leave the European Union led to some market fluctuations in June, but the worst may not be over. Italy has scheduled a vote in October, and although it is technically a referendum on making changes to the country’s constitution, it has broader implications. Italians view the vote as supporting or condemning the current leadership, and a no-confidence vote could well trigger a departure from the European Union. The exit of even a handful of countries from the European Union could have significant repercussions for the entire European economy.
Is Central Bank Intervention Akin to Financial Socialism?
There are many who view intervention by a central bank as something akin to financial socialism. They argue that the free market can and will adjust if given a fair chance. Obviously, there is a fine line between the government that assists the market occasionally and the government that artificially props up the market. Japan is one example of the latter.
Japan’s central bank has a strategy of printing more money to buy more stocks. The Bank of Japan is a top-10 stockholder in approximately 90 percent of the companies appearing on the Nikkei 225, and the bank owns 55 percent of the Japanese Exchange Traded Funds. One analyst asserts that what the bank is doing is tantamount to “nationalizing the stock market.” This leads to several concerns, including what might happen if other buyers sell to the bank and what will happen when the market goes into a correction.
Should Investors Worry About the Market Calm?
Analysts can make predictions, but no one can say for certain what the stock market is going to do over the next few months. In this age of a global economy, conditions in remote nations can have a significant impact on the American market. You can keep up with changing economic conditions at the Personal Money Store.