Is Volatility Here to Stay?
Current events seem to have raised the bar on stock market volatility. Today, seemingly no news is good for a 5% swing up or down. While a 5% swing in an individual stock may not be out of the ordinary, day-to-day fluctuations of that magnitude for the market as a whole certainly are. Does this mean even in a post recovery market, we can expect to see 10, 15 and 20% movements in individual issue share price be something of the norm? If so, how will that effect corporate governance?
Even today, corporate America is mired in managing for the market. Anyone in a large corporate environment, from the CEO to plant managers lives for the quarter in order to meet analyst expectations. Changing the rules, or more vigorously enforcing the rules on public disclosure has made it more difficult for corporations to manage analyst expectations.
With the price of missing expectations now even higher, corporate behavior will necessarily change. Like with anything, if the cost of failure increases, the propensity to take risk lessens. You might jump at the opportunity to point out that there are some people out there that should have been more reluctant to take the risks they did and you would be right. We are, however, talking about industry as a whole now. If corporate behavior is now expected to be considerably more risk averse, what outcomes can we expect?
My own guess is that we can expect to see the hurdle rates for new investments in products, facilities and equipment and acquisitions be significantly higher. Innovation will suffer and perhaps productivity. Let’s hope that the market settles down and cooler heads prevail. The long term impact of a loss of innovations and efficiency is not something we want for the American economy. The bailouts have pushed a big burden downstream and we’ll need a vibrant business environment to absorb it in the future.
Richard Gabel
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