The markets put in a quiet first week of the year.  There was not very much in the way of big news this past week other than continued bank problems in Europe and saber rattling from Iran.  Granted both of these are concerns to the global economy, but not new headlines.

One of T. Rowe Price’s recent advertisements about the global economy attempts to emphasize how interconnected the world has become.  One of the commercials asks questions about how fishing in the North Sea has an impact on Japanese fishing, or how U.S. legislation has an impact on food consumption in Italy.  Understanding connections in today’s world is very important.

While the T. Rowe Price commercials do a fantastic job of tying the world together in the current environment, the most important connections are Central Bank moves.  For example, how does quantitative easing in the United States affect food prices in India, and how do Swiss currency interventions affect the price of commodities?

Recently, I came across a study of market volatility.  The study used the daily New York Stock Exchange (NYSE) advance-decline data going back to 1970.  Advance-decline data simply looks at the number of stocks advancing (increasing) and the number of stocks declining in value.  What it looked for was outsized ratios of daily advance-decline data.  A ratio over 9:1, whether it be advancers to decliners, or decliners to advancers, is considered outsized.  The results are below.

Some items to take note of are:

  • 2011 had the highest number of days with a 9:1 ratio (or more) at 11
  • 2011 had the single worst ratio day at 64:1 declines to advance
  • The timeframe from 2007-2011 has been the most volatile since 1970
  • The 2000-2003 (dotcom blow out) timeframe had zero instances of a 9:1 ratio
  • The second most volatile time period was 1978 to 1982, which was the period where the Federal Reserve was at work trying to lower interest rates

The biggest single take away from the above chart is that while Central Banks would like us to believe that they actually calm market volatility, they are really the creators of prolonged market turbulence.  Why is our current environment the most volatile?  The answer would be that all major global Central Banks are intervening in their economies on a regular basis and in significant fashion.  It appears volatility is here to stay so long as Central Banks are at the forefront of global economies.  The question is whether the Central Banks’ moves are having intended consequences, or creating more unintended consequences?  More on that next week.

Do you have an investment strategy that seeks to protect your portfolio against volatile economic conditions?  Call me to schedule a free review of your current investment portfolio – 913.402.6099.

John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals.  For more information, visit https://www.chladekwealth.com.

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