Ed Peters
June 8, 2022

Bloomberg recently featured an article titled “Lockstep Stock Market is Forcing Everyone to be a Macro Trader.”1 The article noted that the correlation across stocks has increased substantially. Markets seem to be less concerned about individual stock stories than about the overall economy and its effect on all stocks. Investors appear to be interpreting news in a fairly uniform way. When a Fed governor says that they may pause rate hikes in September, the market soars. The next day, another Fed governor doesn’t agree, and the market plummets.

This is the kind of behavior I described in the Fractal Market Hypothesis (FMH) in 19942. (A summary can be found in this earlier post on June 5, 2020.) During calm times, long-term and short-term investors coexist in the market. Because of their diverse investment horizons, they may value the same information differently. But when the long term becomes uncertain, long-term investors tend to shorten their investment horizon. The investment horizon of the market as a whole becomes less diverse and more uniform as investors begin to interpret information in much the same way. Liquidity drops because most of the trading is on one side, causing wide swings in the market.

The FMH has held up well. Academics have found that markets did, in fact, behave like this in the Tech Bubble of 2000 and the Global Financial Crisis of 2008. The fact we are seeing this type of behavior again now (as we also did in 2020) means that a continued bear market is likely. Meanwhile, we can expect continued high volatility until more certainty returns to the long-term outlook and investors go back to having diverse investment horizons. Given all the uncertainties in the world today, it may be a while before that happens.

1Wang, Lu, Elaine Chen, and Elena Popina. “Lockstep Stock Market Is Forcing Everyone to Be a Macro Trader.” Bloomberg. June 2022
2Peters, Edgar E. Fractal Market Analysis: Applying Chaos Theory to Investment and Economics. Vol. 24. John Wiley & Sons, 1994.

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