Should Investors Brace for a More Volatile Market?

As the stock market took another tumble Monday, it inevitably made many individual investors again wonder whether the market is becoming more volatile--and perhaps too volatile for their financial health.

The question has recently inspired much debate and research. But many who have studied the issue have concluded that the wrenching rises and falls shouldn’t be of great concern to the investors who are willing to invest for the long term.

It’s not hard to understand what investors find so scary in the market’s gyrations. For many, memories have still not faded from the Oct. 19, 1987, crash, which sliced 508 points from the Dow. Then there was the 190-point “mini-crash” of last Oct. 13. And Monday’s drop was preceded by a 71.46-point drop in the Dow on Jan. 12.

Unquestionably, these daily point swings in the Dow are greater and come more swiftly than they used to. But when price changes are analyzed on a percentage basis, and over a longer intervals, the story is different.

Ibbotson Associates, an investment research firm in Chicago, has concluded that when stock price changes are measured on a minute-to-minute or hour-to-hour basis, they are indeed more volatile than they used to be. But when monthly or yearly changes in prices are tracked, there’s no appreciable difference from earlier decades, the research firm says.

Ibbotson studied the daily variations in the prices of the Standard & Poor’s 500-stock index and found that over the past four years, the index had swung more violently than at any time since the 1920s. But the monthly and yearly changes in the S&P; 500 are only about average, Ibbotson says.

Laurence B. Siegel, a managing director at Ibbotson, says there may be three reasons stock prices have become more volatile on a minute-to-minute or hour-to-hour basis in recent years.

The use of computers has allowed institutional traders to more quickly analyze what’s occurring in the financial world and to more quickly buy or sell securities or futures once they’ve decided to act. Also, in the past four years, stock prices have been relatively high; investors have been skittish as they have considered selling their holdings and taking profits.

Last, so-called program trading techniques may also have contributed to the gyrations, Siegel says. He adds, however, that “there is less solid evidence that programs are a factor.”

To put recent volatility in perspective, Siegel said that October, 1987, was only the fifth-most volatile month in the century.

While he discounts the significance of the short-term fluctuations, Siegel acknowledges their psychological impact. “Long-term investors aren’t hurt by daily volatility, but that doesn’t make it any easier to swallow when the market falls out of bed,” Siegel says.

The Paine Webber investment firm has also taken up the volatility question, and it concluded after analyzing daily changes in the S&P; index that stocks were slightly more volatile in the 1980s than in the 1970s.

One reason for the increased movement, the firm’s researchers note, is that in the 1980s central banks allowed interest rates to fluctuate more freely without intervening. That movement, in turn, brought quicker changes in the securities and currency markets.

Also contributing to the greater volatility was the closer meshing of world financial markets, they say. Now changes in the markets of one country are more likely to have a greater impact abroad.

Joanne Hill, director of derivative-products research at Paine Webber, suggested that the stock market’s gyrations seem greater in part because the daily changes in the Dow index are large. “If we split the Dow, we wouldn’t feel like things are as volatile as they are,” she said.

But analysts say if there is not a long-term increase in volatility, the markets are without question unusually unstable this month. They blamed investors’ insecurities about weak corporate earnings, interest rates and the world economy.

And many see more wild swings ahead.

Edward Lavarnway, director of options trading at First Albany Corp., says in the past four weeks the S&P; 500 index has been about 50% more volatile than normal, as judged by the statistical measures called standard deviations. “Right now, investors don’t know which way to turn,” he says.