The stock market has swung wildly over the past 7 months with 2 down moves over 10% followed by 2 up moves of over 10%. And, in between these moves were 4 other 5% moves. What does this volatility tell the investor? Historically, periods of high volatility are bearish signs. The takeaway of high volatility is that projections of future economic outcomes are becoming more diverse. And, therefore uncertainty in the market is increasing. An increase in uncertainty means an increase in risk. And more risk means investors need to be paid more to accept it. This means prices must go down.

This quarter was characterized by individual investors withdrawing billions of dollars from investment funds while on the other hand corporate stock buybacks were near highs. This divergence was the main reason for volatility. My view on this is that the average investor is scared by the problems of the world and their believe that governments can’t fix them. Corporations, on the other hand, view exceptionally low interest rates as an opportunity to tilt their capital structure in favor of debt by borrowing money to buy back stock. The average investors’ sentiment could easily effect his consumption behavior. That would likely lead to a slower economy. However, corporate buybacks generally don’t coincide with higher levels of investment spending. So, the anticipation of a weakening economy by individual investors is probably likely to be self-fulfilling.

Although individual investor selling doesn’t necessarily mean a bear market is in the making, the current economic circumstances of the world seem to justify worry that markets will go down. The U.S. stock market is up 200% in the past 7 years. Stock prices are not at bargain basement prices. Interest rates are at historically low rates. As a result, stock prices are unlikely to be stimulated by rates going down further. Government borrowing is at historically high rates. Increased government spending programs that could stimulate the economy is unlikely to happen. Finally, worker wages continue to be stagnant. This means consumers are constrained in their ability and desire to consume more. One final point to consider in determining the next direction of the economy and the stock market is governmental action itself. The primary economic policy driver to stimulate the economies of the world has been a policy of easy money. Rates have been lowered by over 700 basis points over the past 8 years. Yet, the result has been at best tepid. The U.S. is the only major country in the world that might been considered to be on the verge of economic growth.

But if the U.S., the largest economy in the world, was thought to be breaking out of its economic doldrums, why did the ECB, the BOJ, the BOE, and the FED feel the necessity of drastically  increasing monetary easing these last two weeks? In my mind, the only reason to do so would be to plug a dam of likely bad economic probabilities considered likely by these gentlemen. This concerted effort only reinforces my thinking that the market and the economy are in trouble. It’s time to take risk off the table.