The stock market volatility seen in August will probably go down as one of the most volatile times ever experienced in market history. At its worst over four days, US stocks as measured by the NYSE composite index, recorded a succession of dramatic daily moves; minus 7%, plus 5.2%, minus 4.4% and the plus 4.6%. To put this into context, the 15 year daily average move is around 0.8%. The intraday moves were even more dramatic with 90% of stocks moving in the same direction on a single day. Whilst there have been bigger single day moves, there has never been quite the extreme four day period.
The rationales for these moves are not hard to identify. Heightened volatility in world equity markets during August was the culmination of the re-igniting of the sovereign debt crisis in Europe, the painfully protracted US debt ceiling negotiations and weaker than expected global growth indicators.
The question is whether or not it tells us anything?
Certainly most of the economic data that is coming out of Europe at the moment is negative. The August Purchasing Managers Index showed output rising only marginally and Spanish and Italian figures are consistent with renewed recessions there. About the only bright spot was in France where the service sector saw growth. The German economy is still expanding but the rate of decline has accelerated. The net result is that the there has been a considerable loss of momentum in the Eurozone. This is compounded by the debt negotiations that are still ongoing in Europe and given the fragility of Angela Merkel’s political position, everything looks very precarious.
Having said this, it is nothing particularly new. These issues have been around for nearly two years now. However, the volatility may have been compounded by low equity volumes allowing for massive spikes that otherwise would have been absorbed in normal day-to-day trading activity or the fact that many investors were away on (northern European) holidays.
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