Terry McCrann: Why share market volatility is back with vengeance

Brace yourself: volatility has returned to stalk the share market. So what’s causing it, and where should you look for clues about what lies ahead? Terry McCrann explains.

Here we go again. Volatility is back to stalk Wall Street and investors are getting nervous. So what’s causing it, how will it affect the Aussie market and where should you look for clues about what lies ahead? Terry McCrann explains.

We are back to waking up every morning wondering what sort of world has been made for us overnight in New York — and in particular, at the bottom end of Manhattan, on Wall Street.

As far as the investment environment is concerned, we learn each morning most immediately what’s likely to happen when our stockmarket opens at 10am, and also what’s likely to happen to the value of the Aussie dollar and interest rates.

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We first “woke up” to that chilling reality back in October 1987.

That was when Wall St dropped more than 20 per cent in a single day, and a similar one-day fall was deadlocked into our downunder market before a single share had traded.

We saw it again with the Global Financial Crisis in September 2008 — although rather than a one-day plunge over the cliff, it was more of an extended train-crash over the days and weeks after Lehman Brothers went down.

US Federal Reserve chair Jerome Powell.

And we saw the same downunder day-follows-night inevitability play out yesterday.

Overnight Friday, the Dow plunged more than 400 points. Yesterday, our market followed with a 69-point drop.

Clearly (and comfortingly) the scale of yesterday’s drop was nothing like those previous two episodes.

And there’s nothing to yet suggest that this might have been one of those “small shocks” that precede — and indeed predict — “the big one”.

In fact, drops of 400 points on Wall Street have become dime-a-dozen events.

That’s not just because the Dow is up around 26,000 points (which is still near to an all-time record), but because we live in more volatile times.

Share prices can plunge and they can soar — and they do, more than they used to.

Indeed, we’ve just lived through a few months when the Dow went down a thumping 4000 points and then promptly bounced right back.

To emphasise the point, it took barely a month going down, then barely a month to come back up.

US investment bank Lehman Brothers filed for bankruptcy protection a decade ago last September.

There broad cause of that plunge was a combination of some uncertainties,

One was the dazzling and seemingly never-ending rises in the share prices of the great US and global tech stocks, Amazon, Google, Apple, Microsoft and, to a lesser extent, Facebook.

The other was the seemingly relentless rise in official US interest rates.

Higher policy interest rates are usually bad for share prices — especially the share prices of “glamour” and already highly-priced stocks like the above cohort.

And indeed, higher rates should be bad for the prices of such stocks, at least initially.

The immediate cause of the bounceback was the clear indication from the Fed — the US Federal Reserve, which is their version of our Reserve Bank — that it would ease off changing interest rates in any way that would be too unwelcome on “the Street”.

Late last week, the Fed went further. The central bank essentially promised Wall St that it would abandon any further rate rises.

It even hinted that it would top up the proverbial punchbowl with 100-proof hooch if the party showed any signs of flagging.

Initially, Wall Street went ‘whoopee’: On the first day of trading after that promise from the Fed, the Dow went up over 200 points.

But then, on the second day, it started to look the “Fed gift horse” in the mouth more closely.

To put it bluntly, Wall Street found itself asking, ‘what do these guys know but are aren’t telling us that has them worried big-time?’.

Men, women and children await free food on Christmas Day in 1933 at the height of the Great Depression.

The answer is, actually, nothing.

Nothing, that is, other than the uncertainties about the US and global economies that are out there for all to see.

My take is that the US economy — the biggest and still the most important in the world — remains in pretty good shape.

So in terms of those moments when we wake up each morning wondering what’s in store for our market, the biggest influence in my view will be this.

It will be the Fed’s promise to not simply “do what it takes” to keep Wall Street happy, but to over and maybe even pre-emptively deliver.

That almost certainly means greater and more exaggerated volatility.

Wall Street will swing from confidence in the so-called “Fed put” — with down days or drops even more extended than we saw in December, demanding more “Fed hooch” — to spells of panic over bad “events” or statistics on the economy.

In sum, our market is now even more clearly hostage to what happens on Wall Street.

And in turn, Wall Street is hostage to what the Fed does and perceptions of what it might do (and why) — with the Fed in turn hostage to what happens on Wall St in a bizarre feedback loop.

THE OTHER CRITICAL FACTOR

What matters for our economy — for jobs, business, tourism, tax and much more, and for their impact on investments such as property — is what happens more directly to our north, in China.

The US remains the single most important economy in and for the global economy.

But China remains the single most important economy — indeed, more now than it’s ever been — for our local economy.

China is more important to the Australian economy than ever before.

In 2009, China was the biggest factor in saving us from joining the rest of the developed world in the most serious recession since the Great Depression of the 1930s.

That was followed by the RBA slashing interest rates and then the Rudd government’s fiscal pump-priming.

China is now even more important to our economy: back then, it wasn’t pouring money into property and apartments. Back then it wasn’t our biggest source of tourists.

Yet there has never been greater uncertainty about where the Chinese economy, and China more broadly, is headed.

There’s little point trying to analyse the “statistics” and even less in listening to the “experts” — there are none.

Just watch the money: exports and imports, tourists, gamblers and property.