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Market Turbulence

by Craig MacKinlay

We have once again entered a period of substantial market volatility. Using the Dow Jones Industrial Average as a measure of the market, large moves have been observed in recent months. As an example, consider the week ending October 4. On Tuesday of that week, the Dow fell 344 points, followed by a 494 point drop on Wednesday. These drops were followed by rebounds of 121 points on Thursday and 373 points on Friday. Given the level of the Dow is approximately 26000, these moves are not excessive in percentage terms, but nonetheless they certainly can be a source of concern.

What is the source of this heightened volatility? Often, these volatile periods can be explained by a primary factor – for example, a dramatic economic slowdown. However, in the current environment the volatility driver is multidimensional in nature. One dimension is the prospects for future economic growth. Another dimension is the role of political considerations elevated by the election next year.

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