Market Volatility: Delivering the Message

The participants, players and pros in finance (the traders, bankers, analysts, and deal-makers) love euphemisms.  They play with words and phrases to get deals done, raise capital, make investments, advise companies, and keep investors comfortable. Sometimes they are guilty of rolling out old products with brand-new, updated nomenclature.

Remember "junk bonds."  When the industry introduced them as an important, popular financing channel for young companies in the 1980's--thanks mostly to the trading prowess of then-powerhouse bank Drexel Burnham, nobody minded calling them "junk." When the junk market imploded for a period in the late 1980's-early 1990's and after Drexel was railroaded into non-existence partly because of fraud, market-makers and bankers avoided the term.

When the market revived and such bonds found a permanent place on the fixed-income shelf, the industry preferred to call them "high-yield" instruments.  They are still referred to as high-yield bonds. "Junk bonds," the term, receded into finance history.

Finance historians will likely be able to identify other times when the industry recycled instruments and financial strategies, but unveiled them later under the banner of new terms, new phrasing.  A play on words.

This fall, financial markets have rocked and rolled like a roller-coaster with plunges that remind us of episodes during the financial crisis.  But investment analysts, the media, financial consultants and bankers have been careful in their choice of words, if only to keep investors comfortable and calm, if only to avert the possibility of panic and rampant selling. Markets have fallen steeply some days; other days they have crept upward. 

But industry participants prefer not to convey to investors (clients, shareholders, et. al.) that markets are in trouble.  They prefer more palatable terms.  You hear often these days that markets are going through a "correction"--which implies that the surges in the past year overstepped their targets and are settling back to where they should be.  You hear markets are "recalibrating," suggesting that equity-market values are settling into their proper valuations.

You also hear such terms as "volatility" and "divergence."

Are advisers, bankers, and the media being deceitful? Or are they doing their part to discourage investors and traders from irrational, panic-stricken behavior? Are the terms a fair interpretation of what is actually going on?  If headlines hint at "market recalibration" instead of exclaiming "market plunge," will that keep traders and investors focused on fundamentals and long-term strategies and trends?

It's likely a little of both.  A little bit of deceit, and a lot of encouraging investors and market-players to act rationally.  And it's also a little bit of acknowledging how equity markets have moved in the past.  If traders and investment managers say the market is "recalibrating" while the Dow is falling by hundreds of points, they suggest, too, that (a) markets might have over-shot their true values in the past year and (b) decades of technical analysis suggest equity markets (at least those in the U.S.) do tend to bounce back. To ensure investors and traders (from the Baby Boomers with nest eggs to the black boxes in the back rooms of hedge funds) use common sense and not stir trouble, they avoid declaring markets are in a free for all.

The industry works that way.  Use terminology that won't unsettle stomachs.  Bankers won't necessarily say a company lacks cash, but will suggest it is "illiquid."  A company with exorbitant amounts of debt, struggling to find ways to meet interest and principal payments, is not necessarily over-burdened with too many loans, but is "highly leveraged." The company with dwindling net worth is "under-capitalized."

Creative terminology is not new in finance.  There is, nonetheless, the ongoing tendency to come up with even more clever terms to describe market activity.  When stock markets crashed in 1929, few headlines denoted a "market correction."  When they crashed in 1989, we didn't hear much about "market recalibrations." Each market event spawns more terms to attempt to describe what's going on...

...and to keep investors sane and in the game.

Tracy Williams

See also:
CFN:  Market Volatility:  Can You Stand It? 2011
CFN: Dark Days at Knight Capital, 2012
CFN:  Alibaba's IPO, 2014
CFN:  High Frequency Trading:  What's Next? 2012
CFN:  No Time for Doldrums, 2013