The market has been roiled in recent weeks and months by a seemingly endless stream of sour economic news, ranging from manufacturing declines to rising debt concerns in Europe. At the same time, however, The Associated Press reports that stocks have seen major gains from brief moments of hope. Rather than offering encouragement, this volatility has pushed many investors away from stocks.
The AP notes some of the dramatic effects of the volatile market, with the Dow Jones industrial average gaining or losing more than 200 points 16 times over the course of the last two month. In two consecutive weeks the market had its second-best and second-worst performances, gaining 5 percent and then losing 6 percent.
Some investors suggested that the cause was the inexperience in many institutions as traders took their summer vacations, but as volume picked back up in September volatility continued.
Bloomberg reports that the Chicago Board Options Exchange Volatility Index rose 160 percent in the third quarter to a recent high of 42.96. Though any value above 40 has generally preceded a recovery in the market, it also illustrates the concerns of many investors.
"We see the VIX in the 40s as a sign the emotion in the market is extreme," Jeffrey Kleintop, chief market strategest of LPL Financial, wrote to Bloomberg in an email. "It is usually a good buying indicator when it is in the 40s."
The AP notes that not everyone is interested in buying back into the market at this point. Data from the Investment Company Institute suggests that retail investors took $36 billion out of U.S. stocks, which represents the largest withdrawal other than October 2008. Jeffrey Sica, president of Sica Wealth Management, has recommended clients hold no more than 10 percent of their wealth in stocks, initially for fear of Federal Reserve policy and more recently for fear of volatility.
The Wall Street Journal suggests that investors have taken a warier stance toward the stock market recently as well, particularly as some of the negative economic trends continue to play out. In particular, the ongoing European debt crisis has many people worried about the potential for sudden and catastrophic collapses. Instead, CNBC suggests that a more defensive strategy of searching out low-cost stocks that offer substantial returns in the form of dividends. Particularly with stable companies unlikely to go out of business, dividends offer more certainty than asset values.