What causes stock-market volatility?

August 30, 2019
Taryn Lee-Johnston

If you look at a long-term graph of any stock market, especially ones in mature markets, then you’ll probably see a long-term upward trend.  Look a little closer, however, and you’ll see that the nice upward line is actually a bit jagged, showing quite obvious dips here and there.  Zoom in closer still and you’ll see parts of the line where the stock market has been up one moment and down the next and then back up again and then back down again and so on.  That’s volatility and while investors may dislike it (just as sailors may prefer to avoid choppy seas), it’s a fact of investing life and it has three, main causes.

Politics

While Brexit may be dominating the headlines in the UK, the truth of the matter is that politics has long had the ability to influence the stock market.  What’s more, now that even small companies (and the investors who back them) can now operate on a genuinely global basis, it’s become increasingly common for political issues in one country to influence the stock market in another.  Volatility can happen when investors feel uncertain about what actions politicians will take on issues such as government spending, international trade agreements and their corollaries taxes and tariffs.  This may be because the government of the day has not been clear and consistent in their approach.  Alternatively, it may be because the market does not know what government is going to be in power for the foreseeable future (e.g. it’s election time).

Economics

Similar comments apply to economics, in fact, there is often a close link between politics and economics, which makes sense given that politician’s play a key role in the economic growth of a country (or lack thereof).  They are, however, not the only influence over the state of the economy.  There are many other factors at play and there are varying degrees to which politicians can influence them.  For example, politicians can use their legislative and regulatory power to encourage or discourage investors from acting in certain ways.  The UK government’s use of stamp duty is a case in point, it is charged at different rates depending on whether the purchaser is an investor, someone moving into their second or subsequent residential home or a first-time buyer.  Politicians cannot, however, influence factors such as the weather, which can be a major factor in the economic health of a country, especially for industries such as agriculture and transport.

Social changes

This may seem an odd factor to quote, but at the end of the day, stock markets are made up of companies and companies exist to serve their customers who are people.  So when society goes through meaningful changes, as it periodically does, companies have to work out what they are going to do about it.  The performance of individual companies may therefore be rather variable depending on how well they are managing to cope with the changes and if multiple companies are all dealing with the same process of change at the same time, then the result may be general volatility.  In fact, even if only a small number of companies are going through this process, the size of these companies may lead to ripples of volatility being spread through the stock market as a whole.  One example of this is the situation with the Gillette brand, which seems to be finding it a challenge to position itself so it is viewed favourably by a younger audience without sacrificing its existing user base.  Gillette’s recent advertising campaigns have been somewhat controversial and rather hit-and-miss, hence its stock price has been rather up and down.

 

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