Why Dow Investors Should Expect Even More Volatility
The Dow Jones Industrials are continuing their recent run of triple-digit volatility, dropping 205 by 10:55 a.m. EDT, with all 30 of its components lower on the day. After a long period of low volatility, the move has taken some investors by surprise. But when you take a longer-term perspective, what's surprising is how long stock-market investors didn't have to deal with the current levels of choppiness in the market.
Even after yesterday's much-anticipated Federal Reserve announcement, in which it presented some of its initial thoughts about pulling back from its extensive monetary interventions, the S&P 500 Volatility Index remains at relatively low levels from a historical perspective. Throughout much of the past several years since the end of the bull market in 2007, volatility has been well above current levels, with occasional spikes to two or three times what you're seeing now. What we've seen over the past year has been a relative aberration, and although similarly calm markets prevailed throughout much of the boom period in the mid-2000s, the rise in volatility isn't even close to approaching crisis levels yet.
Moreover, most stocks within the Dow are moving similar amounts, with only a couple of stocks posting declines of more than 2%. That suggests market-driven trading, rather than stock-specific action, although the relatively strong performance from Cisco Systems , which is down just 0.6%, shows that investors are still looking for potential value in their stock picks. Cisco is looking at emerging markets for growth, with CEO John Chambers recently noting that U.S. tax policy all but forced the company to look outside its domestic operations to expand. Moreover, its purchase of Composite Software should help the company expand its role in virtualization technology, a key component of cloud-computing infrastructure, as Cisco broadens its expertise across the IT industry.
The next question for the market depends on whether adverse market conditions lead to changes in strategic thinking. We've already seen one victim of that change: Insurance software and services provider Ebix plunged more than 40% after investment firm Goldman Sachs(NYSE: GS) canceled a planned merger with a Goldman affiliate. M&A activity has increased recently, but falling markets often lead to fewer mergers actually going through and can also lead to reductions in IPOs coming to market as well. That's bad news for Goldman as well, which relies on underwriting such deals.
Long-term investors shouldn't let the Dow's volatility worry them, but they should get used to it. Eight straight triple-digit moves may be unusual, but heightened levels of market bumpiness really aren't.
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Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Cisco Systems, Ebix, and Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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