Volatile stock market driven by impulsive investor fears

Photo of the madness on wall street.

Wall Street just can't stay stable. CC by believekevin/Flickr

The stock market forged ahead last week on news that the consumer confidence index rose. The markets went into reverse a short time later when the Fed released minutes from its latest meeting. The markets rose again on Wednesday, this time on data showing growth in American and Chinese manufacturing output.  This late burst of schizophrenia concludes the darkest August for stock traders in ten years. The Market Volatility Index, also known as the VIX, or “fear index,” jumped nearly 11 percent during the month for its biggest August jump since 2001.

Volatility defined: the fear index

At the closing bell Monday last week, the VIX was documented at 27.21. Tuesday, the VIX finished at 24.55 — a drop of 4.2 percent. The VIX made up the loss on Wednesday, moving to 28.77 — a 4.8 percent rise. A report on the current state of the VIX by MarketWatch said that traders gauge investors’ fear with the metric because the number grows along with market uncertainty. The rise of the fear index matched the fall of the stock market as August progressed to its dismal end. The VIX is up one day and down the next. However, the Wall Street Journal reports that it would have to shoot much higher to cause widespread panic. Genuine concern was evident in 2008 when the fear index went past 80 after Lehman Brothers imploded.The market’s “flash crash” in May generated global jitters. The fear index passed 80 at the time.

Markets not behaving normally

The Fed revealed it knows not where the U.S. economy is bound or exactly what actions will influence its direction. This lack of understanding scared the markets once more to bring a fitting end to the worst August for traders since 2001. Yet stocks resumed climbing Wednesday, the Associated Press reports. Reports showing robust gains in U.S. and Chinese manufacturing surprised everyone and generated optimism about economic recovery worldwide. The sputtering U.S. economy led traders to wager that corporate earnings would suffer in August, thus bringing down the markets. On the flip side, expanding economies in foreign countries will benefit many major U.S. corporations that conduct business internationally.

Analysts are united in their dumbfounded-ness

The market’s sudden turnaround Wednesday after finishing out a dismal August the day before left analysts flat-footed, according to the New York Times. Stephen J. Carl, an equity trader on Wall Street, told the Times that he was taking for granted that the pre-Labor Day week would be uneventful. The manufacturing index, a key metric offered to traders by the Institute of Supply Management, rose surprisingly in August to 56.3 after coming in at 55.5 in July. A lesser score was forecast by economists responding to a Thomson Reuters poll — 53.0. The impact of those numbers confounded Carl. He told the Times he was “perplexed” that manufacturing index of 56.3 would be bumping stocks. But reality may be setting in again soon enough. The markets have been looking ahead to Friday’s jobs report with trepidation. The Labor Department jobs report is expected to show the loss of another 100,000 jobs. Unemployment, after holding steady at 9.5 percent through the summer, is predicted to jump to 9.6 percent. Also rising, of course, will be the VIX.



Wall Street Journal

Associated Press

New York Times

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