Where’s all the share market volatility coming from?

There is quite a lot of talk about volatility coming back to share markets all of a sudden, and with the talk there’s also bit of conjecture about where the volatility originates from.

Some say it’s because interest rates and bond yields are beginning to rise; others will point to the end of quantitative easing in the United States and elsewhere for the bumpier ride.

The return of inflation has been mentioned quite a lot recently as a reason why share markets are jumpy all of a sudden, by what has the return of inflation in the United States really got to do with share market volatility?

The link between share market volatility and inflation has to do with the recalibration investors are making to their expectation of share market performance, according to Dr Shane Oliver, AMP Capital’s Chief Economist.

The reason we have the volatility is simple, Oliver says:

“Investors have been used to low volatility for so long, low inflation, low interest rates low bond yields and that was factored into many investment markets share markets. Now we are moving into a world of possibly higher inflation, higher interest rates, investors have to reprice and adjust their expectations,” Oliver explains in this interview with AMP Capital TV.

Further, there’s a bit of a battle of the “bulls and the bears” taking place at the moment, Oliver adds, pointing out that some market watchers and investors see an uptick in inflation in the United States as a good thing, while other investors are focusing on the negative impact of the transition that’s taking place at the moment.

“If interest rates go up, bond yields go up, that makes share markets a little less attractive compared to bonds and cash at the margin, and investors need to make that adjustment,” Oliver notes, explaining the rational for the dips we’ve seen in markets this year.

Share markets dropped over two consecutive days locally in early February, led by even steeper falls over seas, before recovering their losses towards the end of the month.

Meanwhile, there’s a silver lining for the more optimistic share markets watchers, Oliver adds.

From higher inflation and higher interest rates, you’re also getting potentially higher profits growth, he says.

“An uptick in inflation is not a bad thing, but investors have to adjust their expectations and that’s what’s causing the volatility,” he says.