The New Normal: How Volatility Became a Permanent Feature of Global Markets

Defining Volatility: Historical Context vs. Modern Reality

Volatility, in financial terms, refers to the degree of variation of a trading price series over time  typically measured by standard deviation or variance. Historically, periods of high volatility were associated with crises: wars, recessions, political upheavals.

But what's different today is not that volatility exists, it's how frequently and intensely it occurs, even in the absence of traditional "crisis" events. Small news triggers big reactions. Calm periods are shorter. Market swings are sharper.

The once-unshakable pillars of global finance  long-term stability, trust in institutions, and gradual change have eroded, creating an environment where volatility is no longer occasional, but perpetual.

Key Drivers of Permanent Volatility

1. Global Interconnectedness

The modern world is hyper-connected. A supply chain disruption in Vietnam can send ripples through stock prices in New York. Political decisions in Brussels can impact commodity markets in Brazil.

In a world where economies, financial systems, and technologies are intertwined, local events quickly become global phenomena, amplifying volatility across borders and sectors.

2. Algorithmic and Quantitative Trading

Today, machines control a significant portion of trading volume. Algorithms operate at lightning speed, reacting to micro-changes in data and headlines before we even have time to blink.

While automation can increase efficiency, it also magnifies market moves. What once might have been a minor dip can escalate into a sharp sell-off as trading bots trigger cascading effects.

3. Information Overload and Social Media

Markets used to have time to digest information. Now, they're bombarded with a relentless stream of data, much of it unfiltered, exaggerated, or outright false.

Social media platforms, in particular, create echo chambers where rumors and speculation spread faster than facts. This fuels emotional reactions in markets, often with little regard for fundamentals.

4. Monetary Policy Uncertainty

Central banks, once seen as stabilisers, have become sources of uncertainty themselves. With interest rates pinned near zero for over a decade, and unprecedented interventions like quantitative easing, markets are now addicted to central bank policy and hypersensitive to any hint of change.

COVID-19 and the Market Reactions

In early 2020, the COVID-19 pandemic revealed just how hyper-reactive the modern market had become.

• Stock indices fell into bear territory at record speed.
• Oil prices briefly turned negative for the first time in history.
• Volatility indices like the VIX spiked to levels unseen since the 2008 crisis.
   

What's striking is not just the magnitude of these moves, but how fast they unfolded. Markets that once would have taken months to price in uncertainty now respond within hours, sometimes minutes.

The COVID-19 crash  and the equally swift rebound fueled by stimulus perfectly encapsulates the era of permanent volatility: violent moves in both directions, driven by fear, liquidity, and algorithmic trades rather than long-term fundamentals.

Kristalina Georgieva, Managing Director of the IMF and recognised by Barron’s as one of the most influential women in U.S. finance, stated during an IMF speech in October 2022, “Uncertainty and volatility are now constants in the global economy.”

Living with Volatility

The lesson for investors and policymakers is that volatility is no longer the exception. It's the environment we operate in.

Rather than hoping for a return to "normal," we must adapt to a reality where change is constant, uncertainty is high, and resilience not prediction  is the ultimate asset.