What's going on?

Global stock markets have erased all of this year�s gains in the last few days, but a strong rally in the US late on Tuesday gave investors hope that the worst is over.

What does this mean?

Stock prices had been on a historic tear, tramping upwards through most of 2017 before accelerating in January. At the same time, volatility � which measures how dramatically stock prices move � fell to unprecedented lows. In other words, it was generally a slow and steady grind higher for most of the past 18 months.


But then things changed in heart-stopping fashion. No catalyst was immediately apparent, although last week�s bond market selloff appeared to contribute to the initial weakness in stocks. US stocks finished down 4% on Monday and the weakness spilled over into other markets. After a day with more swings than a children�s playground, US stocks did then eventually rally (tweet this) to finish up almost 2% on Tuesday.

Why should I care?

For markets: The huge increase in volatility cost some investors a lot of money.

A popular investment strategy over the past year or so has been to sell volatility, which means that investors make money when markets are calm � a winning trade until recently. This strategy has been packaged into easy-to-trade �exchange-traded notes�, which make buying into the strategy as simple as buying a stock. As volatility increased by its largest-ever amount late on Monday, investors in those products lost almost all of their money.


The bigger picture: The outlook for the overall economy hasn�t changed � yet.

The global economy is in no worse shape, fundamentally, than it was two weeks ago, when �synchronized global growth� was a major justification for record-high stock prices. There are still lots of reasons to be positive! If the market�s sharp selloff resumes, however, there is a risk that it�ll dent consumer and business confidence, leading to a slowdown in spending � and thus hurting the wider economy.