Is Volatility an Important Measurement of Economic Sentiment? - Stash Learn

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Mar 7, 2018

Is Volatility an Important Measurement of Economic Sentiment?

By Lindsay Goldwert
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Volatility May Not Always Be Good or Bad

When we hear the word volatility we often associate it with bad news. When the markets are up you don’t hear, “Volatility in the markets as they surge to record highs!” Instead you might hear, “Markets surge on good news out of Washington!”

However, when bad news is presented, that’s when we hear about volatility. In actuality, volatility is a measurement of highs and lows.

People Need to Realize Gains

A storm in the market doesn’t necessarily mean that people are panicking and that there’s a problem in the economy.  It’s important to consider all possibilities when looking at volatility in the market.

The truth is that dips in the market will occur no matter how well the economy is doing. People who have been investing and enjoying this record breaking growth have only actually earned money on paper. Their investment account may show a nice figure but until they sell some of their investments and turn those paper gains into actual gains they haven’t actually made a profit.

It’s very common for investors to take some profit out of the market.

This does not necessarily mean they have lost confidence in the market. In fact, it could mean they want to diversify with different investments or start a business of their own to employ people in their hometown.

In short, volatility in the market is normal. A market that keeps going up and up, can often cause analysts to start worrying.

Money Moves Around

One reason why stock markets have grown so rapidly is because that has been one of the best places to invest in the pursuit of gains.

After the recession in 2008-2009, the Federal Reserve lowered interest rates to spur investment. This also meant that interest rates were low for bonds and guaranteed investments. Now that the economy has improved, the Fed has consistently been raising interest rates with three more hikes projected over the next year.

In February, there was some real volatility in the market with a 1,000+ point decline in a single. day. But in the grand scheme of things, this can actually indicate a healthy economy that appears to be growing stronger in all areas – not just the stock market.

So, is volatility an important measure for sentiments about the economy? Yes, it absolutely can be an important measure. However, you should always look at the reasons behind the volatility and ask if this volatility is necessarily good, bad, or neither.

Understanding the market

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Written by

Lindsay Goldwert

Lindsay Goldwert is an author and freelance personal finance writer, as well as the host of Spent podcast


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