Research Brief: Stock Market – October 2018

Rising interest rates, midterm elections spark equity market volatility. The stock market suffered its second largest single-day decline of the year on Wednesday, Oct. 10, contributing to a 4 percent weekly drop. Simultaneously, the S&P Volatility Index (VIX), a measure of how quickly equity markets are moving, rose from 15 to 24 in the past weeks, indicating a strong market sell-off. Both were precipitated by long-term interest rates rising rapidly earlier this month, carrying the 10-year Treasury yield to 3.25 percent from a prior trading range of 2.85 to 3.05 percent for most of 2018. These trends, in conjunction with concerns over how fast interest rates will continue to rise and uncertainty surrounding the midterm elections, caused significant selling pressure in equity markets. The sharp move in interest rates will impact the economy at various intervals moving forward, lifting the cost of debt financing and accelerating credit-related stress, raising the prospect of additional volatility in upcoming months.

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