December 7, 5:00 pm EST

Last year, the stock market broke a 21-year old record of the most consecutive days without a 3% intraday drawdown — some 240+ straight days.

We’ve now had a 3% intraday drawdown (open to low) three times since just early October.

So, what is responsible for the rise in volatility?  Why such a contrast from last year?

It’s regime change.  After nine years of zero interest rates and trillions of dollars of QE, the torch was passed this year.  We entered the year with big tax cuts to implement.

This was the official transition from a monetary policy-driven economic recovery, to a fiscal stimulus-driven recovery.  The Fed passed the economic stimulus torch to the White House.

Now, there was good reason that volatility remained subdued under the Fed’s emergency level zero-interest-rate policy.  Why? The Fed told us, explicitly, that they (and other major global central banks) stood “ready to act” against any potential shocks that could disrupt the global economic recovery.  That was an explicit promise to absorb risks so that investors (businesses, consumers, etc) would keep economic activity moving, by spending, hiring and investing.

The Fed (and other central banks, namely the ECB) had to be the backstop, so that people would pursue higher risk/return assets, in a world where risk-free assets yielded nothing.  That was good enough to secure an economic recovery, but only at stall-speed levels of growth.

With that, as we entered the year, the U.S. economy was, for the first time in more than nine years, removing the central bank backstop (removing the life support for the economy).  The gameplan: To replace low interest rates and QE with a $1.5 trillion fiscal stimulus package to catapult the economy out of the economic rut of 1% growth, and back toward sustainable 3% (trend) growth. And with that influence, the economy might have a chance to sustainably mend and breath on its own again.

So far we’ve gotten the growth (whether or not it’s sustainable has yet to be seen).  But this regime change has also introduced uncertainty (and shock risks) back into the economy and markets.  That resets the scale on volatility. And I think that adjustment has been underway.

With that said, the pendulum often swings a little too far in the opposite direction at first (from little-to-no volatility to a lot, in this case).

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