Stocks are in uncharted territory with volatility spikes and drops in all of the major equity indices to start the New Year. It has been ugly, with $2.5 trillion in market capitalization being wiped out in the first four trading days of 2016, and may signal a dramatic rise in cross-asset volatility for the rest of 2016.
Why is this all happening? Plain and simple, the path to Federal Reserve monetary-policy normalization will be painful. With divergent monetary policy, there is less scope for suppression of market volatility. The Fed is beginning to tighten and drain liquidity from the markets, utilizing reverse repurchases to provide a soft floor under short-term interest rates.