Anybody remember December 2018? Let’s refresh: The sky was falling. Investors were taking shelter, cringing over fears of a global economic slowdown, rising interest rates and flattening yield curves, plummeting commodity prices and a trade war between the world’s two largest economies. From Dec. 3 to Christmas Eve, the S&P 500 tumbled more than 15 per cent; the TSX slid almost 10 per cent over the same period.
This is not to suggest there was no reason behind the recent recovery, which in some ways was predictable even in the depths of the correction. The Federal Reserve hiked its target rate in mid-December, but also hinted that it was approaching some kind of neutral; the hint was confirmed in January, when chair Jerome Powell out-and-out stated that the Fed would be patient in further raising rates. As for trade, there were signs of thawing throughout December: the U.S.
So markets have recovered — and the volatility that defined the year-end selloff has largely gone missing. The CBOE Volatility Index, or VIX, which spiked on Dec. 24, has fallen back to its historical low range. The volatility is also less volatile: the so-called VVIX, which measures the 30-day expected volatility of the VIX, has retreated by about a third since Christmas.
For one thing, the markets now seem to be betting on policy backstops to a global economy that seems to be sputtering. Whether the Fed pauses or Beijing spends, the underlying reality remains that things are slowing down. Fed officials lowered their GDP growth projections this week to 2.1 per cent for 2019, which would be a percentage-point lower than last year. China is still on course to slow: official growth projections would put economic expansion at its weakest pace since 1990 — again.
Fearmongering