What Are Market Jitters?

"Market jitters" is a colloquial term for an elevated state of anxiety and perceived uncertainty about the economy or a specific asset market.

Market jitters can be a sign that the stock market is overdue for a pullback or correction. This can lead to a repricing of risk or further degenerate into a significant economic downturn.

Key Takeaways

  • Market jitters refers to a state of increased anxiety and uncertainty among market participants. 
  • Unpriced risk and uncertainty in response to changing economic conditions, economic shocks, or negative market psychology all play a role in market jitters.
  • Market jitters can induce a flight to safety into low-risk assets, but can also be advantageous for investments and trading strategies that benefit from high volatility. 

Understanding Market Jitters

Market jitters is a phrase associated with the turning point at the peak of a bull market or a stock market rally. This is usually when a negative economic shock, unexpectedly bad economic data, or poor corporate earnings reports increase market volatility. These events signal that there may be trouble in the financial markets.

When markets experience jitters it can be a sign they are overdue for a correction. Investors may reassess their portfolios and either consider shifts in tactical asset allocation, or rebalancing to bring their portfolios back to their desired strategic asset allocation. As risk is repriced, market jitters can lead to big flows into and out of different global asset classes.

As the saying goes, markets hate uncertainty. Market jitters often involve not only risk (known or estimable factors that can be priced in) but true uncertainty (unknown factors whose risk or probability cannot reliably estimated). Efficient markets may be able to handle risk well and adjust well to changing risk across various asset classes, but uncertainty is more difficult or impossible to accurately price. 

Though uncertainty by its nature cannot be factored into prices, economists have devised ways to estimate the general perception of uncertainty in an economy. They use measures of asset price volatility, the dispersion of forecasts of economic performance among major forecasters, and the frequency of media mentions of terms related to uncertainty. Time periods when these measures are elevated can be considered episodes of market jitters. 

Psychological factors often end up playing a role during periods of heightened uncertainty, which can lead to high volatility, dramatic price swings, and market instability. Keynesian economics refers to these types of factors as "animal spirits" due to their perceived irrationality. In a worst case scenario, a market may experience a setback purely as a result of market jitters, if the sentiment devolves into general pessimism.  

During periods of market jitters, investments and trading strategies that are resilient to or benefit from market volatility may be advantageous. However, they may also fail dramatically if the investors guess wrong. Market jitters also tend to induce flights to safety in investments, where investors try to protect themselves from risk and uncertainty by moving into lower risk, lower return asset classes. 

Example of Market Jitters

In the first half of 2018, the U.S. stock market experienced market jitters, because of fears that the Federal Reserve's interest rate hikes and quantitative tightening might quash the economic recovery, and trigger a sell-off in the bond market and the stock market.

Adding to their fears was the flattening of the yield curve and the sudden widening in the LIBOR-OIS spread, which is a measure 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, otherwise known as the "fear index."