The fact that there are “ups and downs” on the stock market is an old truism. Yet not all phases are the same. Sometimes the price fluctuations are sharper, and sometimes they are weaker. While the financial markets showed signs of being “well balanced” until early 2018, investor behaviour has been influenced by dramatic fluctuations in sentiment for over a year. The mood quickly shifts from jubilation to despair. In other words, one moment a recession appears unavoidable, then the next it is deemed unlikely.
There are two reasons for this toing and froing. Firstly, the markets are uncertain about the climate for economic growth. Around the world, growth has clearly weakened. However, the data does not point to either a recovery or an economic slump over the coming months. There is little leeway for the economy to slide further. As a result, the markets are reacting tentatively to any bad economic news – many investors fear it will not take much to trigger a recession. On the other hand, good news would spur a recovery just as quickly.
Secondly, the political risks are also causing abrupt changes in mood in this climate. If there’s a threat from one of the protagonists, investors start to fear an immediate escalation in the US-China trade dispute. A gesture of goodwill from the US or Chinese government and their fears are soon dispelled. Brexit also remains full of unexpected twists and turns – and the outcome is more uncertain than ever. All eventualities from a soft Brexit to a no-deal scenario appear conceivable.