Is This "Historic" Volatility?
After Friday's drop like a rock, stocks rocketed up on Monday - then virtually collapsed at the end of the day (yet remaining positive). Tuesday was 400+ points up on the Dow, 43+ on the S&P. A few hundred up here, down there - sometimes all within one trading session - and you've got historic volatility, At least that's what they're saying.
Normally I ignore comments about "volatility." It's an overused term on Wall Street, and therefore frequently meaningless. Typically, it's an emotionally charged term when it refers to falling prices: Nobody likes to lose money. In those cases, "volatility" can be used to rouse investors' fears. Maybe Wall Street pitches some product or service they're pushing that purports to "reduce" volatility. On rare occasions it's applied to rising prices. Since most folks will be rather content when their stock prices rise, there's no fear. Therefore no product or service will be needed. That's why you'll rarely hear the term volatility applied to rising prices.
But this time may be different. The comments of at least three respected sources have, in their own ways, called our current volatile action "historic."
Art Cashin, who's worked on Wall Street forever, opined last week that this current round of volatility reminded him of 1987. If you remember, the biggest one day drop in the stock market - 22% - occurred in October of that year. John Bogle called this the most volatile period in memory. The 88 year old founder of Vanguard has pretty much seen it all. He's also not a pushy salesman, as is the case with most Wall Street types, so we listen when he speaks. Finally, Burt Dohmen, who's firm Dohmen Capital opened its doors in the late 1970s, and who publicly and consistently warned of a coming credit crisis in 2007, and who understands the price action of the stock market better than just about anyone I read, thinks this volatility needs our attention. While he also makes reference to 1987, he thinks an exact repeat would be unlikely. But that's no reason to dismiss these violent swings.
With trusted sources like this shaking their heads, it's probably a good idea to think about what the current wild action may be signalling. But the first thing to do is to not "get used to it." In a world where attention spans last miliseconds, and knowledge of the past is non-existent, it's easy to slip into a mode where we start thinking the recent action is perfectly normal - or at least, using a currently overused phrase, a "new normal." It's not normal.
As for what it's signalling, let's defer any speculation for now.
Normally I ignore comments about "volatility." It's an overused term on Wall Street, and therefore frequently meaningless. Typically, it's an emotionally charged term when it refers to falling prices: Nobody likes to lose money. In those cases, "volatility" can be used to rouse investors' fears. Maybe Wall Street pitches some product or service they're pushing that purports to "reduce" volatility. On rare occasions it's applied to rising prices. Since most folks will be rather content when their stock prices rise, there's no fear. Therefore no product or service will be needed. That's why you'll rarely hear the term volatility applied to rising prices.
But this time may be different. The comments of at least three respected sources have, in their own ways, called our current volatile action "historic."
Art Cashin, who's worked on Wall Street forever, opined last week that this current round of volatility reminded him of 1987. If you remember, the biggest one day drop in the stock market - 22% - occurred in October of that year. John Bogle called this the most volatile period in memory. The 88 year old founder of Vanguard has pretty much seen it all. He's also not a pushy salesman, as is the case with most Wall Street types, so we listen when he speaks. Finally, Burt Dohmen, who's firm Dohmen Capital opened its doors in the late 1970s, and who publicly and consistently warned of a coming credit crisis in 2007, and who understands the price action of the stock market better than just about anyone I read, thinks this volatility needs our attention. While he also makes reference to 1987, he thinks an exact repeat would be unlikely. But that's no reason to dismiss these violent swings.
With trusted sources like this shaking their heads, it's probably a good idea to think about what the current wild action may be signalling. But the first thing to do is to not "get used to it." In a world where attention spans last miliseconds, and knowledge of the past is non-existent, it's easy to slip into a mode where we start thinking the recent action is perfectly normal - or at least, using a currently overused phrase, a "new normal." It's not normal.
As for what it's signalling, let's defer any speculation for now.
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