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Counterintuitively, this is far from the stock market's most volatile year on record. But how much will the roller-coaster affect CFOs' strategies and tactics?
Vincent Ryan, CFO Magazine
October 1, 2008
Is your neck beginning to ache? This has been a roller-coaster year for the stock market. Thanks in part to the 504-point drop following Lehman Brothers's bankruptcy filing, the Dow Jones Industrial Average had seen daily swings of 1 percent on 70 days by mid-September, surpassing last year's total of 56 days and exceeding the total of 2005 and 2006 combined, according to a recent CFO analysis. Adding to that tremulous feeling: the S&P 500's volatility index hit a 70-year high in March, with 1 percent swings on more than half of the trading days in the year to that point.
You might think that this qualifies 2008 as the most volatile year on record, but in fact, at press time, it ranked only 11th, according to Standard& Poor's data. Both the number and size of notable Dow movements this year are dwarfed by the years following the Great Depression and the September 11 attacks.
Even the perception of higher than-usual volatility, though, might cause some CFOs to question their strategies. Instead, they should "be selectively deaf to a stock price," says Francois Mallete, a vice president at L.E.K. Consulting. That's because external factors such as the macroeconomy and investor emotions can move stocks as much as a company's fundamentals.
Market volatility does not affect strategy at Overseas Shipholding Group, but it could affect tactics, says finance chief Myles Itkin. In a volatile market, the company could accelerate share buybacks (to get a cheaper price) or pull the trigger sooner on an undervalued acquisition.
On another level, stock gyrations can be plain annoying. "We answer more investor hypotheticals, like, 'If the economy goes into a complete tailspin, what are you guys going to do?'" says William Gerber, CFO of TD Ameritrade. "We have to bring them back and explain that [the situation] is not catastrophic."
Not catastrophic, but not likely to abate anytime soon, either. It's generally taken two and a half years for markets to settle after a major exogenous event or financial crisis, and longer, experts say, if economic or political uncertainty increases.