Much has been made of the market’s recent volatility. Today, 300-, 400-, and even 500-point swings in the Dow feel almost normal.
Many factors have been cited as contributors to the big moves: hedge funds delevering their portfolios, institutional investors selling liquid assets (i.e., stocks) to raise money to fund commitments to less liquid investments, mutual fund redemptions, and so on. No doubt, they’ve all played a role—and with no apparent end in sight.
I would add another factor at work: The market is trying to reprice the economic system in the United States.
Over the past several months, we’ve seen a seismic shift in the financial services industry: not only a reduction in the number of players, but a near-halt in key financial functions (e.g., municipal bond market making, investment banking). With the government’s intervention, the survivors are now quasi-government agencies whose ability to take risk is significantly reduced.
Risk-taking is a key driver of the capitalist system, one that’s been synonymous with the United States since our beginning. In addition, the confluence of so many events in such a short period of time has exacerbated the challenge that all investors face: evaluating new pieces of information and how they fit into—or change—the existing view of the markets. Even in “normal” times, there’s a steady stream of developments to digest. This time, it feels like a fire hose.
Bottom line? I think the market can’t figure out what this new environment is worth.
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