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Extreme volatility — the new normal?

David Brancaccio Nov 24, 2011

It’s not just your imagination. It’s been a year of historic volatility in the financial markets. For example, take those wildly swinging days in between August 5 to 30, 2011. The S&P 500 closed up or down more than 2.5 percent every day. Every. Day.

There are competing theories as to why markets are more volatile, ranging from the rise of electronic trading to the growth of hedge funds. Add an enormous amount of geo-political uncertainty in the form of the eurozone crisis, the downgrading of U.S. debt, and a slow, painful economic recovery here in the U.S., and it’s we’re looking at a near perfect storm.

Brett Hammond is a senior economist at TIAA-CREF. He sees short- and long-term reasons for this extreme volatility.

Short-term, it’s about the drop in corporate profits. After falling off a cliff in 2008, companies roared back with 35 percent growth in 2009 and 2010. But that’s not sustainable. Corporate earnings are strong this year, too, just not like they were and that’s putting investors on edge.

Longer-term, Hammond says it’s about an increased propensity for asset bubbles like we saw with housing and oil. In the last 12 years, we’ve had more severe asset bubbles than at any time since the great recession. It’s not the bubble going up that’s volatile, it’s when it bursts that markets bounce up and down.

Hammond says investors don’t have to fear volatility. The usual rules still apply: diversify, think long-term, and don’t get caught up in the heightened emotions driving the markets these days.

Also on today’s show, the Wall Street Journal reports that shoppers in Los Angeles, Boston and Atlanta will wear special electronic bracelets that measure supposedly tell-tale changes in perspiration levels as they shop. Sweat means excitement, or so the theory goes.

Fifty people get the special bracelets. An expected 152 million will register their interest in personal consumption with their cash and credit this weekend. That news is keeping our Marketplace Daily Pulse at zero today.

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