Why share prices are see-sawing

Feb 08, 2018

TWO recent successive one-day falls in the Dow Jones Industrial Average—one for an ominous-sounding 666 points and the second for a record 1,175 points—have grabbed the headlines. The declines were not as scary in percentage terms. Monday's 4.6% drop did not even make the all-time top ten. But they did follow a long period in which it seemed as if the American market could only go up, a tendency often noted by President Donald Trump. And the sell-off was global, with Europe and emerging markets also affected. What explains the sudden volatility?

The long run-up in share prices is one explanation for the sudden change of mood. Institutional investors had larger-than-normal holdings in equities, and valuations were high. The cyclically adjusted price-earnings ratio, as calculated by Robert Shiller of Yale, is double its long-term average. Many investors had bet that the recent period of low volatility, as measured by the Vix (or fear) index, would continue. When prices started to fall, they had to scramble to cover their positions; two funds...Continue reading


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