Thursday, October 30, 2008

Historic Stock Market Volatility and the Concentration of Ownership in Stocks

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 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.