Monday, September 12, 2011

May You Live In Interesting Times

This morning's New York Times has a good piece discussing the recent extreme swings in the stock market.

And, as it turns out, the market really has been been considerably more volatile over the last few years than most periods of the last few decades.

According to the Times' article:

Since the start of this century, The Times found, price fluctuations of 4 percent or more during intraday sessions have occurred nearly six times more than they did on average in the four decades leading up to 2000. The price swings today may feel even more notable because the 1990s represented a relatively calm time for trading. In contrast, price fluctuations of 1 percent and more during intraday trading were more common in the 1970s and 1980s.

The piece goes on to discuss many of the possible reasons for the higher level of volatility. For example, high frequency trading - where huge blocks of shares are traded in a nanosecond in an attempt to capitalize on tiny price changes - now accounts for 60% of trading volume in any given day.

Economic uncertainty, of course, is playing a huge role as well. In particular, Europe each day seems to show more and more financial distress, and it is not overly dramatic to say that the fate of the euro will be decided in the next few weeks.

Still, before one becomes too pessimistic, the Times article notes that huge declines in the market are rarely preceded by periods of stock market volatility:

And volatility may not herald dips in prices — a study by Sam Stovall, a strategist at S.& P. Equity Research, found that markets since 1950 have typically been calm just before the highest consecutive price declines. But, he found, volatility goes up after prices start going down and the markets can remain nervous while prices recover.