REFLECTIONS

After a Decade of Calm, Bigger Waves May Batter the Markets

Feb 7, 2018 | 00:47 GMT

A wild few days on the New York Stock Exchange may signal the return of market volatility.

Traders work on the floor of the New York Stock Exchange (NYSE) on February 6, 2018, in New York City. Following Monday's over 1000 point drop, the Dow Jones Industrial Average briefly fell over 500 points in morning trading.

(Spencer Platt/Getty Images)

Highlights

  • Market fluctuations in recent days show the connection between tightening monetary conditions and an increase in volatility.
  • This trend represents a return to the normal state of affairs that existed before quantitative easing.
  • Even if the latest episode proves fleeting, the increased volatility that it represents is expected to continue, especially as central banks continue to tighten monetary policy.

For Jerome Powell, Monday's first day on the job as the new Federal Reserve chairman was certainly memorable, but perhaps not in the way he might have wished. At one point during the trading day on Feb. 5, the Dow Jones industrial index had taken a historic intraday tumble, falling 1,500 points before rebounding to end the day with just an 1,175-point loss. The record size of the drop may have grabbed headlines, but in terms of scope, the 4.6 percent contraction of the stock market index pales in comparison to previous bad market days -- on "Black Monday" in 1987, for instance, the Dow plummeted by a whopping 22.6 percent. What is most notable about the latest episode is that the United States had enjoyed a period of relative financial tranquility, making the violence of these market moves particularly startling....

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