What are Call Jitters?
“Market jitters” is a colloquial term for an elevated state of anxiety and perceived uncertainty about the economy or a unequivocal asset market. It can be a sign that the stock market is overdue for a pullback or correction, and can lead to a repricing of risk or help degenerate into a significant economic downturn.
Key Takeaways
- Market jitters refers to a state of increased anxiety and uncertainty mid market participants.
- Unpriced risk and uncertainty in response to changing economic conditions, economic shocks, or negative superstore psychology all play a role in market jitters.
- Market jitters can induce a flight to safety into low-risk assets, but can also be useful for investments and trading strategies that benefit from high volatility.
Understanding Market Jitters
Market jitters is a saying associated with the turning point at the peak of a bull market or a stock market rally, when a negative solvent shock, unexpectedly bad economic data, or poor corporate earnings reports increase market volatility. These at the times signal that there may be trouble in the financial markets.
When markets experience jitters it can be a sign they are tardy for a correction. Investors may reassess their portfolios and either consider shifts in tactical asset allocation, or rebalancing to produce their portfolios back to their desired strategic asset allocation. As risk is repriced, market jitters can out to big flows into and out of different global asset classes.
As the saying goes, markets hate uncertainty. Market jitters ordinarily involve not only risk (known or estimable factors that can be priced in) but true uncertainty (unknown factors whose imperil or probability cannot reliably estimated). Efficient markets may be able to handle risk well and adjust well to changing chance across various asset classes, but uncertainty is more difficult or impossible to accurately price.
Though uncertainty by its features cannot be factored into prices, economists have devised ways to estimate the general perception of uncertainty in an thrift. They use measures of asset price volatility, the dispersion of forecasts of economic performance among major forecasters, and the frequency of environment mentions of terms related to uncertainty. Time periods when these measures are elevated can be considered episodes of market-place jitters.
Psychological factors often end up playing a role during periods of heightened uncertainty, which can lead to shrill volatility, dramatic price swings, and market instability. Keynesian economics refers to these types of factors as “zooid spirits” due to their perceived irrationality. In a worst case scenario, a market may experience a setback purely as a result of customer base jitters, if the sentiment devolves into general pessimism.
During periods of market jitters, investments and trading policies that are resilient to or benefit from market volatility may be advantageous, but may also fail dramatically if the investors guess err. However, market jitters also tend to induce flights to safety in investments, where investors try to protect themselves from jeopardy and uncertainty by moving into lower risk, lower return asset classes.
Example of Market Jitters
In the pre-eminent half of 2018, the U.S. stock market experienced market jitters, because of fears that the Federal Reserve’s involve rate hikes and quantitative tightening might quash the economic recovery, and trigger a sell-off in the bond market and the goats market. Adding to their fears was the flattening of the yield curve and the sudden widening in the LIBOR-OIS spread, which is a extreme of stress in the banking sector. The result of these market jitters was a big spike in the VIX, the CBOE Volatility Index for the S&P 500, differently known as the “fear index.”