The wild ride in stocks is likely caused by a structural change, economist Fritz Meyer said earlier this week, and it may not end anytime soon.
Meyer, an independent financial economist, says technical market issues are likely the cause of the extreme volatility experienced in recent weeks in stock prices. The loss of “specialists” on the New York Stock Exchange — market makers who used to be on the floor of the exchange and who would buy stocks oversold on emotional plunges — is likely a major factor in the recent volatility, along with computerized trading programs.
The Dow plunged 1000 points in the 30-minutes after trading opened on August 24. On three of the 13 trading days since then, stock indexes lost 3% or more of their value in a single day. At the recent low, the correction amounted to a 13.4% loss from the all-time high achieved in May.
According to Meyer, the loss of specialist firms over the past decade, along with the rise of momentum-following program trades, has exacerbated stock volatility. He sees the increased volatility displayed in the opening minutes of trading on August 24, 2015 as part of a growing pattern of extremes, like the Flash Crash of 2010. These high-speed descents were caused by cascading sell orders triggered by momentum-following computerized trading programs, Meyer says. The void left by market-makers will get filled eventually, he says. That's how markets work. If Meyer is right, advisors are well-positioned to be buyers when it happens.
Meyer has over 35 years of Wall Street experience, but relishes his role over the past five years as an independent observer. Meyer had served as senior strategist for one of the world's largest investment companies for nearly a decade. In 2009, Meyer became an independent economist and found me through a mutual friend, economist Ed Yardeni. Meyer has no product to sell, other than his research and making speeches at client events and conferences for financial professionals.
When someone with Fritz Meyer's credentials, credibility and monthly research says a structural change in the market has occurred and we should all be prepared for this kind of extreme volatility to stay with us, it is news that you want your clients to know. If he is right, The rapid descents to irrational lows will continue and it is likely to make clients uncomfortable. If you don't say anything to clients, if you allow the significantly higher volatility levels to go on without saying anything, you risk looking bad to them.
In addition, if Meyer is right and these rapid irrational descents continue, even as the economic data forecast expansion, it would represent an opportunity for advisors. Advisors would seem well-positioned to fill the void created by electronic algorithmic trading.
See below reviews from attendees of Fritz Meyer's webinar this past Tuesday's. He received an amazing star-rating, yet again, of 4.8.
Click on the image below to see the article emailed Friday night to the clients of advisors who subscribe to Advisor Products email newsletter.