"It's the Mo, stupid." From today's NY Times:
MARKET WATCH
If Ignorance Is Bliss, Why Are Stocks So Shaky?
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By GRETCHEN MORGENSON
EW YORK -- Last week, the U.S. stock market looked a lot like the weather in New England, as described famously by Mark Twain: exceedingly changeable.
On Wednesday, when it was clear that Brazil was going to devalue its currency, U.S. stocks shrugged; the Standard & Poor's 500-stock index fell 0.4 percent. The next day, investors decided that the devaluation had grave consequences for American companies, and the S&P fell almost 1.8 percent.
On Friday, when the currency was allowed to float completely -- the thing investors had feared most -- stocks cheered, with the S&P rising 31.07 points.
An up-and-down stock market is nothing new, of course. But the extremes in mood seem to be rising. And the gyrations last week were especially puzzling because investors had been aware of potential problems in Brazil since August.
Edward M. Kerschner, chief strategist at Paine Webber, said the week's wild ride was to be expected, given the market's 34 percent gain since October. "When you have a fully valued market, by definition it is vulnerable to sentiment swings," he said.
But another, intriguing explanation was offered by Baruch Lev, a professor of accounting at the Stern School of Business at New York University. Lev thinks that volatility has risen because investors are increasingly uninformed about their holdings, thanks largely to huge writeoffs and other accounting practices that muddy financial reports.
"If you know less about the fundamentals of the company you own, then every piece of external information -- Brazil or Russia -- has a huge effect," he said. "If you know a lot, you can really assess that all these shocks from the outside are not really that important."
Lev has data to back up his view. In a study published last year, Lev and a colleague, Paul Zarowin, studied key financial figures -- earnings, cash flows and book values -- at 5,000 companies and analyzed the data's association with changes in those companies' stock prices.
The academics found that over the last 20 years, the correlation has fallen markedly. "This was a controlled experiment," Lev said. "We looked at the role that earnings played in investors' decisions in the late 1970s and early 1980s, and you see this role is decreasing."
Investors still punish companies for missing analysts' estimates. Eastman Kodak shares fell 10.4 percent on Thursday, for example, on disappointing fourth-quarter results. But Lev reckons that investors assign about half the relevance to earnings that they did 20 years ago. Now, when they make their decisions, investors rely instead on information that is less quantitative and even less reliable.
This phenomenon helps explain how the most ephemeral piece of news -- that a company plans to hawk its wares on the World Wide Web, for instance -- results in an immediate pop in the stock. But the trend also means that external events that may have no bearing on the affected companies will continue to rock equities.
Even investors who do their homework and analyze financial data will not be spared volatility in their stocks. But at least they will have an idea of what they own. Meantime, ladies and gents, buckle up. |
