Twitter’s stock has gone for quite a ride in the past week. It swung from $60 a share up to almost $75, and then right back down again. Does Twitter need mood stabilizers? Only a trained medical professional can answer that question. But if it does, it’s not because of the volatility of its stock.
You see, volatility is as volatility does, as they say.
“What you’re seeing is just the uncertainty and volatility of the underlying economics feeding through into the price,” says Scott Clemons, Chief Investment Strategist at Brown Brothers Harriman.
The price of any stock is based on two things: How much money do people think the company will make in the future? And how much is that worth to investors?
For a company like Twitter, which hasn’t made money yet, estimates vary wildly.
“Some analysts think Twitter is the best thing since sliced bread, other analysts can look at it and say, 'Remember MySpace?,'” says Clemons. For a newly-floated company like Twitter, “the valuation is more a matter of faith than it is of analytical observation.”
IT’S JUST THAT TIME OF YEAR
This time of year is usually volatile.
"So many people are on vacation – there’s fewer market players," says Eric Parnell, founder of Gerring Wealth Management.
Basically, stock trading is like a crowd of people all talking at once – voices usually get drowned out. But if there are just a few people in the room, voices – and trades -- carry.
Also, the end of the year is a good opportunity to lock in gains (or losses, if you need to book some) and “position yourself” -- both from a tax perspective and in terms of strategy for the new year.
Many money managers try to position themselves this time of year in stocks that have been hot during the previous year – “it’s really for appearances,” says Wells Fargo Advisors Senior Equity Strategist Scott Wren.
Lastly, Brown Brothers Harriman’s Scott Clemons adds, a lot of people take care of their big philanthropy this time of year. So they might give a bunch of shares to a charity, which will then immediately sell them and cash out.
I’M SO EXCITED, I’M SO SCARED
Volatility might be scary if you’re invested in a stock and you’re watching it bounce all over the place, but in general it’s not a bad thing. In fact, “It’s an opportunity,” says Wells Fargo’s Scott Wren. “You want volatility , you want the market to have some pullback because it gives you opportunities to invest cash you may have on the sidelines.”
But it turns out, Twitter notwithstanding, volatility, as measured by a metric called the VIX, was just at a low for the year. That could mean investors are either being timid, or, as Eric Parnell believes, it’s a sign of complacency.
"Extreme calm can almost be a sign of bad things to come," he says. "It’s always good to have people on guard and show caution, it means people are acting with good discipline."
In a year with strong double-digit gains in the market and "no meaningful correction," it has Parnell eyeing the horizon.
Wells Fargo Advisor’s Scott Wren also expects volatility to pick up in the next few months.
"There are high expectations for 2014 that economic growth will accelerate to a new level," he says. "We don’t see that and I think there will be some surprises."