Is the US-China trade war creating volatility? Part I

Part I of Measuring Stock market response to the Trade War

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Stock markets seemed indifferent to the start of the US-China trade in the summer of 2018. Major indices barely budged as Washington and Beijing increased tariffs in July and August of last year.

Many commentators argued things changed in 2019. Each new development in the trade war appears to bring new headlines about growing fears on Wall Street. And for good reason. In August, the Dow Jones Industrial Average suffered three large nominal drops of more than 400 points.

The narrative is now that Wall St is less certain, and that stock market performance hangs on each new tweet from the White House about US-China relations.

Does the data support that narrative? It depends on how you measure uncertainty.

One way to think about nervousness in stock markets is the VIX, a widely cited index of expected uncertainty.

It turns out that average VIX values in 2018 and 2019 were higher than in 2017.

Is the trade war creating uncertainty?

 
VIX closing values by day. Dotted line is annual average. Gray lines are the four major tariff hikes in US-China trade war.

VIX closing values by day. Dotted line is annual average. Gray lines are the four major tariff hikes in US-China trade war.

 

However, just looking at Trump’s time in office is misleading.

While there was greater uncertainty in August ‘19, VIX values were not out of step with what we’ve been seeing in recent years. In fact, the VIX’s low annual closing average in 2017 was the exception, not the rule.

“Volatility” Nothing new

VIX closing values averaged by year

VIX closing values averaged by year

The “uncertainty” measured by the VIX in 2019 is perfectly consistent with what we saw long before any serious mention of a US-China trade war.

Does that mean the trade war hasn’t increased volatility on stock markets?

Not necessarily. VIX is just one indicator. It doesn’t tell us what shares of individual companies are actually worth. And, it doesn’t tell us how stable actual indices are.

The next post will look more closely at specific indices. The story there is much different.

 
AnalysisJeffrey KucikTrade