Day after day, stocks swing sharply by hundreds of points. Some experts see volatility as a problem. Another viewpoint is that stocks are rightly volatile now because there is so much uncertainty about where the economy is heading. MIT Sloan Professor Andrew Lo says that the last few years have been the most volatile for all of recorded history—10 of the biggest 20 daily upswings and 11 of the largest 20 daily drops since the beginning of 1980 to the end of August have occurred in just the last three years.
MIT's Computer Science and Artificial Intelligence Laboratory (CSAIL) welcomed its first full-time member from the MIT Sloan School of Management: Andrew Lo. While the fields of computer science and artificial intelligence may seem atypical for the work of an economist, Lo feels that joining CSAIL is a natural extension of the research path he has forged for many years.
Stock markets have calmed down over the past few days, but economists and analysts warn that investors face years of severe market swings until national debt crises and other threats to the global financial system are finally resolved. MIT Sloan Professor, Andrew Lo, notes that "What's unique is the volatility of the volatility."
More than ever on record, individual stocks in the Standard & Poor's 500 Index are moving in unison, according to data from the stock market research and money management firm Birinyi Associates. Andrew Lo says "When you have overriding political considerations hanging over the market, all stocks are going to respond in kind."
Experts say investors should expect even more volatility in stocks, as herd trading by hedge funds, knee-jerk trader reaction to news and lightning fast computer programs combine to make for a new and uncomfortable normal on Wall Street. MIT Sloan Professor, Andrew Lo, says "We are seeing extraordinary emotional reactions from central banks, politicians, regulators and investors. That kind of reaction is not conducive for building long-term wealth."
The European Securities and Markets Authority said in a statement that short sales—negative bets on stocks—would be curtailed in France, Belgium, Italy, and Spain. Andrew Lo says that it is impossible to know whether the panic of 2008 would have been worse without the ban, but general studies of short-selling have found that bans on that activity can lead to more volatility in the market and lower trading volume.
With consumer spending already declining in recent months, economics say the plunge in the stock markets over the past month could deal another significant blow to Americans' spending habits—a threat that could imperil any meaningful economic recovery. MIT Sloan Professor, Andrew Lo says: "That kind of perception of a loss in wealth is going to make people more frugal, more reluctant to spend—and that's exactly the wrong direction for the economy to go."
With the combination of increased incidents of malicious hacking, what could be overtaxed computer networks, and now the fragile economy, it's enough to make one nervous about the state of the technology on Wall Street. MIT Sloan Professor, Andrew Lo, says maybe it's not time to panic just yet, though he does caution that "there are periods of time where we go into uncharted waters, where there's just so much trading volume, so much activity that the system can be overwhelmed for a short period of time."
As investors adjusted to a new world in which the United States government doesn't have a perfect credit rating, stocks suffered one of the worst sell-offs in history Monday, and a fresh recession seems increasingly possible. Professor Andrew Lo says: "American voters are going to realize that the political impasse has consequences that will hit them in the pocketbook."