The stock market is more volatile than ever, according to a recent study done by the New York Times. Intra-day price fluctuations of four percent or more have occurred almost six times more since 2000 than they did on average between 1960 and 1999. Ten of the twenty largest daily price increases and eleven of the 20 largest daily price decreases have occurred in the past three years. Louise Story and Graham Bowley of the New York Times report that “Market Swings Are Becoming New Standard.” Observers wonder whether this is a structural (permanent) change or a transitory phenomenon.
On the one hand, high frequency and computerized traders account for 60% of the volume, and the flow of information has generally quickened in the internet age. Those seem to be structural changes that would be likely to increase volatility. The Securities and Exchange Commission has been examining the connection between automated trading and volatility.
In addition, the proliferation of exchange traded funds that track broad indices and trade intra-day like stocks is a structural change that has likely increased the volatility the large indices that they track. Likewise, the proliferation of extreme and exotic exchange traded funds that utilize derivatives and leverage is a structural change that has likely increased volatility.
On the other hand, while bad economic times, continuing jitters over the 2008 bank failures and credit crisis, concerns over Europe, anxiety that the Euro crisis will sink the global economy and markets, and the strident politics that accompanies such anxiety, undermines confidence and feeds a volatility loop, says Robert Shiller, the Yale economics professor, this volatility appears to be transitory rather than permanent unless bad times continue for a prolonged period..
Could increased volatility, whatever the causes, permanently drive investors away from the stock market? The stock market can be extremely volatile while resulting in little or net gain or loss over a decade. Increased volatility (i.e., risk) means increased opportunity for gains and losses for traders. But trading is a high-risk speculative strategy that is not suitable for most investors.
Investors view increased volatility in a flat or declining market as uncompensated risk. Many are reportedly selling and going away, for how long nobody knows. But it seems clear that increased volatility drives investors away from the stock market. That is another trend that bears watching and may be cause for concern.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.