No one can fully explain the market movements. Thus, here is a broad list of fundamental data or happenings that may have helped sparked the last few wild weeks:
- Weakening macro data that could lower earnings estimates.
- European debt problems seem to be escalating with focus moving from the PIIGS to Italy and French and German banks.
- Lack of confidence in Washington.
- Possible overheating in emerging markets. Emerging market equities have performed worse than domestic equities this year.
I am 100% sure this list doesn’t include everything, but I don’t think it’s a stretch to say these are some of the bigger headwinds.
What I am struggling with is why any of the above would lead to increased volatility now. When I read that list, it contains nothing that in my opinion should sneak up on investors. Thus, I have come up with a few possible reasons on why now:
- Psychology. There was a catalyst that got people selling, once they started others got nervous and pulled the plug.
- Margin Calls. As the market starts moving down hedge funds or institutions that buy stocks on margin (borrowing to buy stocks) get margin calls (they need to put up cash to meet the loan). To get cash, investors sell stocks, which in turn puts more downward pressure on stocks and leads to more margin calls. It’s a viscous cycle.
- Computer Trading. This I am less sure about. However, since a lot of trading happens in milliseconds at predetermined prices, I don’t think it’s a stretch to say that once markets were moving down algorithms started saying “sell” making markets move down even further.
While this may not help you make a decision on how to play this – everyone is different and thus strategy will change accordingly – I hope this can help you start to wrap your head around the situation.
