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For the third time since the end of the financial crisis, market volatility is soaring at the same time the Federal Reserve walks away from a stimulus program.
Just a week after the steepest price swings since 2011, turbulence shot up again yesterday, with the Dow Jones Industrial Average (INDU) moving 450 points and Treasuries posting the biggest rally in five years. Gauges of stock volatility have doubled in the past month and a Bank of America Corp. index that tracks swings in equities, Treasuries, currencies and commodities has risen to the highest level in 13 months.
For all the rationales given for the market?s swings — slowing U.S. growth, recession risk in Europe, Ebola, hedge fund meltdowns — a simpler explanation is that investors don?t like it when quantitative easing stops. After climbing to a 17-month high in March 2010, the Standard & Poor?s 500 Index fell 16 percent just as the first program ended. When QE2 ended in June 2011, stocks were in a midst of a decline that sent the S&P 500 down 19 percent.
?It?s not clear whether dovish policies from the Fed that don?t include bond-buying will be as equity-supportive,? Michael Purves, chief global strategist and head of equity derivatives research at Weeden & Co. in Greenwich, Connecticut, said in a phone interview. ?It?s a relatively untested situation that?s driving confusion in the markets, and that confusion is driving risk aversion.?
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