The first few hours of trading in 2016 occurred in Asia, when it was Sunday afternoon in the U.S. By that evening, I had already gotten an alert on my smart phone that Shanghai stocks were trading down 7%, had triggered circuit breakers, and trading had been halted. When you have been in the business as long as I have, you know what’s going to happen over the next 24 hours: A sea of red bled over into Europe and that bled over into equities in the U.S.
That certainly wasn’t the only bout of volatility we had this week. We had the same drama play out in the middle of the week, with China’s equity markets open for only 29 minutes on Thursday before being shut down. In addition, a lot of poor data out of China partially led to the Chinese currency falling to 5-year lows. Many analysts had expected the currency to depreciate this year, but the ferocity of this move really surprised a lot of people.
So, right off the bat, what’s our view of volatility in 2016? Certainly too much volatility and the wrong kind of volatility is not healthy for markets. Nobody in the markets wanted to see the kind of volatility that resulted from the news coming out of North Korea this week, for example.
But on another level, volatility can be good for the markets, as long as it is in measured amounts. Keep in mind that for the last seven years, central banks have intentionally repressed volatility as they tried to revive seemingly dying patients in the form of economies around the world.
But now that some of that central bank accommodation is being taken away, at least in the U.S., we are going to see a bit more volatility. And volatility can be a very healthy thing: It leads to price discovery, which allows capital to be allocated to its best use, which leads to more healthy markets.
So we toast the arrival of 2016, which has come in with a bang. It’s going to be a volatile - and very interesting - year. We’re looking forward to it and will be here each week to bring it to you.
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