At the start of this past year, if we were to tell you that: 1) U.S. tariffs on Chinese imports would increase from 12.0% in 2018 (up already from 3.1% in 2017) to 23.8% and possibly as high as 26.6% (if the December 15 tariffs on end-consumer products are imposed); 2) the ISM manufacturing index would drop below 50 for six consecutive months; 3) fears of an impending recession would be very elevated; 4) the yield curve would be negative throughout most of the year; 5) S&P 500 earnings growth would be just 0.2%; 6) equity mutual funds (using the ICI data) would see net new cash flows of -$264 billion in the first 10 months of this year, almost double the $142 billion in outflows over this same period in 2018; 7) President Trump would be heading toward impeachment; not to mention 8) a recession would occur in Germany and political unrest globally, we might be considered mad to expect the S&P 500 to be 25% higher and volatility across a number of market measures to continue to be exceptionally low—yet, that's what just happened. In this week's Economics Weekly, we examine why volatility has been so low, and why, given some of the risks ahead next year (e.g., the U.S. elections), this might not change in 2020.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.