The stock market has been heaving lately. Since August 1, the Dow Jones Industrial Average has closed 15 trading days more than 100 points higher or lower than it opened. The coincident spike in the S&P 500 volatility index confirms that traders, like the rest of us, are unsettled about the condition of the economy.
“The recent volatility in the market is mainly driven by the uncertainty with the debt crisis both here and in Europe,” said Viktor Todorov, an assistant professor of finance. “The last few weeks have been associated with a lot of news about the economy, but the impact of these events on the real economy is not very clear or uniformly agreed upon among investors. This drives up the volatility,” he added.
Spikes in volatility are common in the stock market. Short terms spikes may a response to news from the Federal Reserve or an unemployment report, Todorov said. Longer term instability, like that which we are seeing currently, signal broader uncertainty about the direction of the economy. Certainly things have been unsettled these last few years, but volatility has not been high throughout that time. Presently, Todorov thinks there’s something else at play. “A new element of this uncertainty (at least to me) is that the political instability seems to play a very clear part in the current volatile markets.”
Todorov thinks the recent ups and downs will be with us for a while. “I think the current period of high volatility will last somewhat longer than just a week or two, simply because we need more actions from the government in solving the debt crisis,” he said. “It is the resolution of this uncertainty that will lead to volatility going down.”
But don’t expect a return to calm markets just yet. With respect to the stagnant economy and persistent European debt crisis, “there seem to be disagreements among economists as to what is the right thing to do,” Todorov said. “Consequently there are different views on the stock market, and that fuels volatility.”
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