Accelerating Market Moves: A Permanent Shift?

One of the peculiar, yet defining, characteristics of equity markets is their ability to consistently confound short-term forecasts. We often see upward market movements, even when the overall environment has a broadly negative backdrop.

Thus it was that by early April, markets quickly reversed their course. In fact, the move was reportedly one of the fastest recoveries end of March, it took just 11 trading sessions to fully regain those losses, despite elevated geopolitical tensions and continued conflict in the Middle East. Why the apparent contradiction?

The answer, of course, is that financial markets look primarily to the future, discounting values back to the present, and often not focusing unduly on current events. Equity valuation continues to be anchored in corporate earnings, and investors have been encouraged by the solid earnings reports from the spring, particularly from the tech sector, which had been pressured earlier in the year due to elevated capital spending.

While market cycles have always exhibited swings in sentiment, sometimes more rapidly than others, the pronounced pace of recent developments has raised questions about whether these movements are becoming more abrupt.

Indeed, technology has caused things to move more quickly, automating and accelerating transaction speed, while enabling near-instant dissemination of information. Market participants now operate in an environment where data is transmitted and absorbed in seconds rather than hours or days.

At the same time, demand-side dynamics have shifted. Investing has become democratized, reflected in broader market participation. Lower-cost investment vehicles and expanded access have enabled portfolio construction previously reserved for high-net-worth investors. This has also influenced investor behaviour. The average holding period for equities, once spanning years, is now measured in months. Meanwhile, even as total market values have risen, the capital sitting on the sidelines has grown. In the U.S., money market funds have doubled to around $8.2 trillion in just five years, from their $4 trillion pandemic levels.¹

However, the shift is not solely demand-driven; supply dynamics have also shifted meaningfully. Many may not realize that the public company universe has contracted as private markets have expanded. U.S.-listed companies have halved from about 8,000 in 1997 to 4,000 today.² Yet global market capitalization has expanded from around $50 trillion in 2011 to over $140 trillion today, driven by the rise of the dominant publicly-traded U.S. and Asian corporates.³

Do these changes imply a permanent regime shift, where volatility cycles become structurally shorter and sharper? These developments suggest structural change — yet every financial cycle differs from those that come before. New “rules” are continually introduced across economic, demographic and geopolitical dimensions. The world is certainly a different place than it was 10 or 20 years ago. The pace of change may be accelerating, but the investing focus remains the same. For long-term investors, seasoned sailors offer a useful reminder: keep your eye on the horizon, rather than the waves.

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<sup>1. www.apolloacademy.com/understanding-demand-for-treasuries-and-why-the-yield-curve-is-steepening/;
2. https://data.worldbank.org/indicator/CM.MKT.LDOM.NO?locations=US;
3. https://en.wikipedia.org/wiki/Market_capitalization</sup>

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