On Increasing Market Volatility And 2019 Trade Wars

Increasing Volatility & Trade Wars

We observe that since 2018 there is increasing stock market volatility (VIX) not only in the DOW index but also in other global stock markets. One principal factor for the recent increasing volatility is the trade war between US and China. In general the stock market only thrives in calm and growth environment.

In this article, we first analyze the well known relationship between DOW index and volatility VIX. Then we examine the relationship between DOW and the Chinese stock markets (SSEC and HSI).

Relationship between DOW and VIX

Simple Observation

Chart 1 – DOW and VIX Correlation

The above chart showed:

• DOW stock index and VIX volatility have very negative correlation (- 0.94).

• Since beginning of 2018, VIX has been increasing.

Forecasts of VIX

Chart 2 – Fourier Cycle Analysis of Monthly VIX

The 2 major cycle components seemed to synchronize currently, leading to a peak in 2020. This peak may even be under estimated.

Chart 3 – Volatility Adjusted DOW as Leading Indicator

The above chart showed the ratio (DOW/VIX) precedes the drop of DOW by about 1-2 years. Hence, the chart predicted that the imminent fall of DOW is near.

Synchronization of Global Stock Markets

We compared DOW with the 2 Chinese stock markets (SSEC, HSI). This will have severe implication for the ongoing trade wars between US and China.

Chart 4 – DOW & SSEC are Highly Correlated

Chart 5 – DOW & HSI are Highly Correlated

Summary

Given the fact that all major stock markets are highly correlated, the recent trade wars between US and China can cascade into an economic slow down and trigger global stock market sell offs. Is there any solution to this scenario? We do not believe there is one, given the mistrust among the trade war participants.

“And let the peace of God rule in your hearts, …” Colossians 3:15

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