Since the beginning of daily
record keeping this type of event has only occurred twice! The highest
volatility occurred on November 21, 1929 at 1.11. 1929 was the beginning
of a several year period where the stock market maintained outrageous
volatility levels. Volatility was still above 0.4 in late 1933. This was
the start of a world wide 25 year secular bear market in equities. 1929
was accompanied by much economic justification for the uncertainty, most
notably an overheated bull market with rampant speculation fueled by easy
credit.
The October 19, 1987 crash referred to as Black Monday yielded a one
day drop in the Dow of 22%. This day of intense movement triggered a volatility
spike to 1.12 on November 12, 1987. This time things were very different
from the 30’s. The world was in a secular bull market and there
were no significant economic justifications for the ’87 crash. Wikipedia
states ”Potential causes for the (1987) decline include program
trading, overvaluation, illiquidity, and market psychology.” Notice
that none of these are directly related to the economy. Robert Schiller
has also done much research on the reason for the ’87 crash. He
found no economic cause and noted that many investors sighted the declines
of the former week as their reason for selling. The crash only lasted
one day and the entire bear market duration was less than 2 months. The
elevated volatility was a flash in the pan and disappeared as fast as
it arrived.
Today the Dow Jones Index has returned to these extreme volatility levels.
Similar to the 1930’s we are in a secular bear market and there
are tremendous economic and credit market problems mounting ever higher
to justify the drop in asset prices. It is a full 2 months after the dizzying
free fall in October and we are still living in an extreme volatility
environment. The rate of market fluctuations in the 70’s didn’t
approach what we have seen in recent months. We may be witnessing the
beginning of sustained volatility. History may not be a crystal ball for
predicting the future, but it makes us aware of what CAN happen. Anyone
claiming that a worldwide depression is impossible in the current day
in age is simply displaying their ignorance of human psychology, its affects
on capital markets, and its relationship to the economy.
Bradley Okresik
12/08
|