Historic Volatility - and Concentration of Stock Ownership

Here's an update from an early October post; it helps illustrate how the recent stock market's volatility has been qualitatively and quantitatively unlike anything we've seen in years. Indeed, this is the highest level of 20-day average true range for the S&P 500 Index since my data began in 1962. That means that we've seen higher volatility than during the 1987 market crash and higher volatility than during the major declines of 1970 and 1974.

The recent bout of extreme short-covering in Volkswagen stock is an illustration of the volatility that can result from a concentration of shares in institutional hands. According to recent estimates, institutions account for over three-quarters of all stock market ownership. By contrast, individuals owned 94% of stocks in 1950 and 63% of stocks in 1980. With the recent liquidations forced upon hedge funds, mutual funds, pension funds, insurers, and other financial institutions, we've seen historic levels of volatility as a function of historic levels of concentration of ownership among institutions.

Comments

[silverpill23:]

i have also recently heard about the significant footprint of the institutional investors. are there any books or articles that further explore the effects of institutional investing on a) the market b) the trend toward indexing and/or c) the herd mentality and it's effect on stocks/bonds?

2008 Oct 30 05:34 PM

[RiskAverseA...:]

Curiously enough, I have written this year about "melt-up prospects" as well as the risk of a "selling avalanche." Both likelihoods, though never certain, do apparently have rather elevated probability. Conditions simply appear rightly geared for facilitating both extremes in volatility. Your observations go some way toward substantiating my view...

2008 Oct 30 06:43 PM

[Jackson Cash:]

Duh.

C'mon, Helen Keller could see that by shear size, institutional investment houses can move markets.

Look at:

1. Oil.
2. Gold.
3. Money.

2008 Oct 30 10:37 PM

[Alan von Al...:]

That brings up the "weight of money" conundrum. Institutions are scared to sell, because it would feel like an avalanche and trigger a crash.

2008 Oct 30 11:35 PM

[wcrxlp edit...:]

And so, all of the institutions haven't figured out how to profit from volatility? Even unprecedented volatility? I think that is unlikely.

2008 Oct 31 08:30 AM