By Saumya Vaishampayan
Rising volatility this year in stocks, bonds, currencies and
commodities has left investors scrambling to figure out what's
going on.
Answers that seem plausible one day are quickly disqualified
when the market veers in the other direction. It wasn't long ago
that the plunge in oil prices seemed to be the biggest factor
driving down equity indexes. But now the S&P 500 is down more
this year than its energy subsector, both declines dwarfed by the
plunge in financial shares.
Finding a widely accepted, overarching thesis has proved
elusive, leading to the rise of multiple, competing, largely
unsatisfactory explanations. Yet analysts and traders keep
searching, hoping to devise a road map for the peaks and valleys
that lie ahead.
"There's a confluence of bad news around the world that really
shakes investor confidence," said Brad McMillan, chief investment
officer for Commonwealth Financial Network, which oversees about
$100 billion. "This volatility is perceived as being very unusual
and scary, which is exacerbating the problem."
So what's the best way to explain market moves? Here are five
theories.
Blame the Fast Money
As the Federal Reserve prepared to raise short-term interest
rates for much of 2015, investors bet that banks would pocket an
expanding difference between what they charge on loans and what
they pay on deposits. But financial shares have tumbled this year
as investors pivoted to embrace "lower for longer"--a sobering
forecast that rates won't rise much for years. The Bank of Japan
shocked an already reeling global financial sector when it cut
rates into negative territory on Jan. 29.
The episode highlights both the gloom over the global economy
and the whipsaw trading that has developed on major "macro"
questions over the past year.
"The fast money moved into banks at the end of 2015 because they
anticipated rate hikes, and then the fast money went out," said
Diane Jaffee, a senior portfolio manager at TCW Group Inc.
Anxious About the Yuan
Some say the current market turmoil has its roots in China. Many
investors believe the country will have no choice but to devalue
the yuan, a move that would likely deepen global economic woes by
adding to transnational competition for scarce export earnings.
Officials say they don't intend to devalue but some hedge funds are
trying to force their hand by making billion-dollar bets against
the currency.
Analysts are watching this struggle closely after an August yuan
devaluation triggered a global selloff, amid concerns that
China--long viewed by Wall Street as miserly with reliable data--is
headed for an economic reckoning. Many investors fear recent
developments mean "a hard landing," said Wayne Lin, a portfolio
manager at QS Investors.
It's the Sovereign-Wealth Funds!
Oil-producing countries poured billions into investment funds
when crude prices were higher. Now, those funds are liquidating
stocks bought in happier times, accelerating the U.S. market
selloff, some theorize.
Some of the U.S. stocks with the highest concentration of
foreign ownership by oil-rich countries include Nasdaq Inc.,
Tiffany & Co., AFLAC Inc. and BlackRock Inc., according to
Deutsche Bank data.
Of course, data on who is and isn't actually selling is scarce,
and there is some reason to wonder if these funds, however large,
could really exert a large effect on U.S. markets.
While J.P. Morgan forecasts that sovereign-wealth funds will be
forced to sell $75 billion in stocks around the world this year,
the U.S. market recently weighed in at $20.95 trillion.
"Oil prices will be persistently challenged, but I don't see
oil-driven sovereign wealth flows being a mortal threat to U.S.
equities or equities in general," said Ben Mandel, global
strategist of multiasset solutions at J.P. Morgan Asset
Management.
The U.S. Could Get Swamped
Many investors are worried that the U.S., in recent years the
strongest-performing economy in the developed world, is about to be
dragged down by global forces including the rise of the dollar.
The U.S. manufacturing sector contracted for the fourth straight
month in January. Jobs growth, long the bright spot of the economic
expansion, slowed last month. Fed officials have signaled
concern.
At the same time, unemployment slipped last month and wages
rose, and many market indicators that may point to future economic
difficulties seem overwrought (consider the decline in bank stocks
that has left many major U.S. lenders trading below the stated
value of their net assets), accentuating uncertainty.
"The biggest risk that's really on everybody's mind is that
there's going to be a sharp slowdown in emerging markets that's
going to spill over into the U.S.," said David Lefkowitz, senior
equity strategist at UBS Wealth Management Americas.
Growth Isn't Growing
The slump in oil prices since June 2014 has largely been
attributed to oversupply, as oil producers around the world
continue pumping crude even at depressed prices. But as benchmark
prices dropped below $30 this year, investors started pointing to a
slowdown in demand as well.
"If commodities prices as a whole are generally weak, that tells
me that generally speaking, global demand is weak," said Paul
Nolte, portfolio manager at Kingsview Asset Management, which
manages about $150 million.
Write to Saumya Vaishampayan at saumya.vaishampayan@wsj.com
(END) Dow Jones Newswires
February 10, 2016 19:39 ET (00:39 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.