How long will high market volatility last?

Market volatility chart

How long will high market volatility last?

There is no denying the high amount of volatility that markets have seen in the first half of 2020. With the sudden imposition of lockdowns that the global pandemic caused, markets reacted almost maniacally to the constant unpredictability of the news flow. While economies were shutting down in many countries, governments were unveiling unprecedented fiscal stimulus packages to offset the sudden downturn in productivity and rising unemployment. Investors struggled to keep up, resulting in volatile trading.

But what can we expect for the future now that we are six months into the pandemic? Those six months has seen testing in many countries improved, a number of vaccines hopeful for the first half of 2021, and many populations starting to overcome the initial first wave of the virus to return to work. Bearing all these positives in mind, what will the implications of this be on market volatility?

Market Volatility In 2020 and Beyond

In short, despite glimmers of good news, markets will most likely see a great deal of volatility for the rest of the year. While governments are doing everything they can to save economies and contain the virus, markets are still very sensitive to any positive or negative stories in any corner of the globe. US unemployment is a good example of this. In some months, the unemployment data has been better than expected, while others it has been poor. The markets react strongly each time this data is released. 

That being said, there are stories that should provide a calmer background for the future. In particular, the work that has already been achieved by governments since the outbreak should not be underplayed. Importantly, risk assets have been supported by the various fiscal and monetary policies that have been announced. 

Additionally, there are some regions that have managed to begin easing lockdown measures without too much of a rise in infection levels. Countries in Asia, for example, have been more successful than others in keeping infection rates low. This should give investors cause for hope that life may be able to return to a new normal before a successful vaccine is released. 

And what is perhaps more of a certainty that will depress volatility, is that investors will continue to make a flight to safety by upping the amount of US dollar they have in their portfolios – as is so often the case in troubled financial times. That being said, given that the global economy is under so much pressure, there are a number of important currencies that are happy to see their currency weaken in an effort to remain globally competitive. So conversely, a pseudo currency war will only seek to worsen volatility.

Key Factors For Investing In The Second Half of 2020

Despite having seen eye watering amounts of money being pledged by governments in aid packages, it is likely that we haven’t seen the last of COVID19 government intervention even though furlough schemes are starting to come to an end. The effects of these large scale fiscal policies are there to improve market sentiment and dampen volatility. Undoubtedly, they have been necessary to stop markets totally seizing up in the face of the global lockdowns.  

However, the problem with mass intervention by governments is that it can cause inflationary pressure. Bearing in mind the level of financial assistance of governments everywhere, the result could lead to inflation that the markets have not had to contend with for almost three decades. So while volatility may not be increased due to government intervention, inflation very well could be. 

Other key short to mid term factors to consider when investing in the second half of 2020, are the presidential election in the US and the Brexit negotiations in the UK and Europe. Both could have serious ramifications on markets and their volatility. In the past, during a US election campaign, investors witnessed more price volatility. There should be no reason to imagine that this year’s election wouldn’t cause the same. In Europe, the Brexit negotiations could mean that the UK economy struggles to recover from the difficulties it is currently seeing thanks to COVID19 restrictions. In fact, its chances of a V shaped recovery continue to worsen

Key Factors For Investing and Volatility in 2021 

While 2020 has been difficult for so many investors for so many reasons, there has been much said about how the lockdowns may force the world to move on from COVID19 with greater care towards the environment. The need for a more sustainable future has been brought to the forefront of many investors’ minds. Market commentators have highlighted that the world has a chance to use the huge stimulus packages to concentrate on infrastructure that is far greener. This could create significant investment opportunities for all in the future.

Other issues that can cause further problems for volatility in 2021 will be the amount of leverage that has opened up around the world – with China being the obvious example. Worryingly, this leverage has crept into secondary markets which could cause systemic problems if left unchecked. 

Ultimately, while it is hopeful that several vaccines will be found for COVID19 at the beginning of 2021, it is by no means a given. This is a huge shadow that is cast over every aspect of our lives, which has obvious implications on our ability to invest confidently. Market volatility will most likely be a characteristic of the markets for some time to come until the virus backdrop improves. Plus, other shadows caused by the virus have come about too. Huge levels of government debt around the world are only worsening which limits governments’ abilities in the future to keep supporting their own individual economies. 

In short, volatility will likely continue to characterize many markets as investors struggle to keep on top of the ever changing news flow.  

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