05/17/2021 — Volatility (Slight Return)
After a month of very little (good) trade, last week gave a glimmer of hope that near-term volatility might improve. The move could be blamed on a variety of culprits but the key component seems to be the looming possibility that inflation is rising faster than previously anticipated.
Sure, the continual yo-yo that is crypto currency may have startled a few novice punters, and the pandemic’s wave of destruction in India could serve as a harbinger of a double black swan event if the virus were to significantly mutate and render our vaccines worthless. The East Coast took a good look at what a gas shortage might look like when hackers hijacked the Colonial Pipeline.
All of these have the potential to cause market disruption ranging from a small downturn to an immense crash, but they all depend on the reaction of people. Some people might think that a flight from crypto may result in investors risking said cash in equities, thus boosting the market. Some people might shrug off a gas shortage as a small term inconvenience, and some people might actually find a second wave of the pandemic likely to bolster markets — after all markets have never been higher as they are.
People are unpredictable.
However, the specter of inflation may change the previously rosy outlook of the Fed. As much as they want to keep the interest rate low to juice the economy, rising inflation tends to force higher interest rates. Bond yields have already shown a willingness to rise, and with a potential nudge from higher interest rates, a certain percentage of investors will find comfort in less risky vehicles than the stock market.
If money leaves the market, the market goes down. If the market goes down, volatility goes up. Sure, it’s ridiculously oversimplified, but it’s what I’m hoping for.
…except for the part about the ticking time bomb of inflation, which is all but certain now that the government has decided to print money as it would toilet paper.