Stock Market Volatility - The New Normal

March 07, 2018
11 months

What is the issue?

  • Various other global and national economic parameters are expected to cause market uncertainties and usher in monetary tightening.
  • Consequently, stocks may experience more volatility for the foreseeable future.

What are the current market trends?

  • The Sensex advanced about 28% and the Nifty climbed 30% in 2017, which slated a record bull run.
  • Also, 2018 saw a strong start but since the beginning of February, stock markets around the world have witnessed a sharp correction.
  • The U.S.’s decision to impose import tariffs on steel and aluminium was the latest development to infuse a sense of uncertainty.
  • While the poor state of health of public sector banks has added to the pain, a more broad-based decline in the markets is palpable.
  • Presently, Sensex and Nifty are marginally down from the initial 2018 levels.
  • Hence, Investors who expected 2018 to be yet another blockbuster year for stocks may have to temper their expectations.

Why is volatility expected to reign?

  • After the sharp correction in February, many expected Indian stocks to rebound to new highs, as in the case of previous corrections.
  • But the Nifty and the Sensex, which largely remained flat till recently after the February fall has now resumed their downtrend.
  • While it is not clear on whether this will continue or a consolidation will take place soon, investors seem willing to take risks and bet high on Indian stocks. 
  • This belies reason as there are fundamental weaknesses like – plummeting corporate earnings, underperforming economy.
  • Hence, considering the irrational optimism despite the underlying risks, it’s only natural that stock prices will tend to oscillate and remain volatile.

What are the challenges?

  • The biggest challenge ahead for stock prices will be higher interest rates as central bankers move to rein in inflation as growth picks up elsewhere.
  • The U.S. Federal Reserve is expected to reduce the size of its balance sheet by $2 trillion in the next four years as it moves to let interest rates rise.
  • Bond yields have begun to reflect the prospect of tighter liquidity and the U.S. 10-year Treasury has almost approached the 3% mark (from 2% 6 months ago)
  • Many noted bond investors have confidently proclaimed the end of the multi-decade bull market in bonds, which began in the early 1980s.
  • Indian bond market too witnessed a sharp increase in yields recently, amid fears of faster inflation and government’s worsening finances.
  • Stocks markets have thus far shown minimal reaction the prospect of higher interest rates (lesser liquidity).
  • But higher interest rates are likely to eventually dampen stock prices, although it will continue to remain volatile.


Source: The Hindu


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