MARKETS ARE VOLATILE IN NATURE

Before revealing the real reason for the market’s volatility, let us look at the two myths encompassing the market.

Oil Price Movements

The theory stating the correlation between oil prices and the market is overly done and has no basis afterall. Slumping oil prices as of late have hugely affected the markets especially the energy sector. However, there are several factors influencing market movements, and oil is only one of them.

Bond Market Illiquidity

Some linked market volatility to bond market illiquidity. Similar to oil price movements, no claim has backed this proposition. But the fixed income liquidity of certain sectors remains challenging. Also, there are instances when some spread markets are less liquid and agitated.

Why some broach this idea? It point to the distinct risk pertaining to such market segments and the overall investor risk aversion. But it has nothing to do with the bond market’s liquidity. Perhaps, liquidity is a concern but it actually does little to make or break the markets.

Referring to the bond market, let’s look at average daily trading volumes for its many segments. The 10-year Treasury futures contract’s ADV has increased to almost $149 billion in 2016. The mortgage market, based on a Credit Suisse data, recorded an ADV of $48 billion last month, the highest in over a year. The ADV of credit markets improved significantly in February.

Now, here’s the real reason for market volatility.

Radical changes in technology and changing demographics are the main driving forces behind market volatility. It all boils down to change, the only constant thing in this world. These are the bigger pictures we see in the market, explaining the major risks impacting the global economy and markets.

One instance is concerns about the Chinese economy. Policymakers are attempting to shift the country from manufacturing to consumerism. Another is the sluggish US economy, constricting the Federal Reserve’s capacity to contend with such an adversity.

Why markets are volatile in nature? Rather, what makes them tick? Change.