Lack of Fundamentals

Terry Flanagan

With the markets as volatile as they have been in recent months, many market participants blame the sharp movements in securities prices on a lack of fundamentals.

Companies have been posting strong profits in recent earnings periods, yet that has largely not been reflected in their securities prices. The markets seemingly fluctuate largely on a plethora of factors that are not related to the actual underlying companies.

“You can find 20 different excuses why the volatility of securities prices goes up or down, with none of them fundamental,” said David Sobel, executive vice president, general counsel and chief compliance officer of Abel/Noser, told Markets Media. “Looking around the world, Greece has been a major reason for the volatility. Europe is affecting our markets tremendously because so much trading is global now. But the bottom line is it’s not reflecting the fundamentals of companies right now.”

Because of the unpredictability of the markets, many classes of investors have chosen to sit by the sidelines until the picture becomes clearer. Market observers and participants have noted that the retail and institutional segments often reduced their day-to-day trading activity in times of volatility.

Since August, the markets have been highly volatile, with two and three percent intraday swings occurring on a regular basis. The surges have come in the wake of a slew of macroeconomic events, including the European debt crisis, the U.S. debt downgrade, and the collapse of MF Global. The Chicago Board Options Exchange’s Volatility Index, or VIX, reached a high of 48 on Aug. 8, as the markets reacted to the lengthy U.S. debt ceiling negotiations and the Standard & Poor’s downgrade of U.S. debt. It then fluctuated from the low-30s to the mid-40s in the following months, once again as European debt concerns weighed on investors. In late October, the VIX had declined to as low as 25. As of mid-day Dec. 5, the VIX was trading at about 27.

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