Forget fallout from the midterms, a murdered journalist, Brexit or the trade war. The biggest reason to brace for enduring stock volatility may be the simplest: It’s just time.
Bank of America Merrill Lynch’s equity and quant team say market signals from the ever-flattening yield curve are clear as day: stock markets are due to begin a new era of elevated price swings.
“A flattening yield curve signaled a withdrawal of liquidity and over the last three cycles has preceded rising volatility by a few years,” the team, including Savita Subramanian, wrote in research this week. The curve has been flattening “over the past couple of years,” they noted.
It’s a version of the quantitative tightening argument for why volatility is climbing: The unprecedented tranquility in stocks seen through the start of the year was a byproduct of extraordinary global stimulus, and it’s reversing as the tide of liquidity recedes.
Bank of America’s call — echoing others — comes as investors scramble to judge whether the current turmoil in equity markets represents a blip or fundamental shift in regime. The S&P 500 Index fell for the 12th session in 14 on Tuesday. Hedge funds that reaped fortunes betting against share swings are nursing losses once more, with echoes of the February tumult.
In some respects, BAML is doubling down on an earlier prediction that liquidity would see an outright contraction by the end of the year. So far, the evidence appears to be moving in the strategists’ favor.