Recent weeks have featured elevated market volatility across equities, fixed income, commodities and currencies. This phenomenon erupted abruptly in very late-January following an extended period over late- 2017/early-2018 of accelerated gains devoid of any material pullbacks, which left market positioning unbalanced. Having entered into the late stages of the business cycle (the length of the U.S. recovery, assuming it continues, will reach the ten year mark in July 2019, tied for the longest on record in the post-WWII period), it is quite normal that the maturation of the market cycle should be characterized by an elevated range of volatility amid rising interest rates and a flattening yield curve. Markets will also have to continue to contend with increased global trade anxiety as the prospect of new U.S. tariffs on steel and aluminum imports of 25% and 10%, respectively, has strained ongoing NAFTA renegotiation talks and presents a new source of market risk.
Financial risk-taking has a neurobiological basis.
That’s the conclusion of two experts in neuroeconomics and behavioural finance – Camelia Kuhnen and Brian Knutson – who co-authored a compelling paper called The Neural Basis Of Financial Risk Taking.
Their discoveries were covered recently in an issue of Financial Advisor1 (originally published January 2, 2014) written by Thom Allison and Andre Golard.
The subject makes fascinating reading, not least because the work helps us understand an issue I’ve written about in the past: loss aversion. This, as many of you know, is the tendency for individuals to prefer avoiding losses rather than accruing gains.