Is Technology Speeding Up Market Cycles?

It stands to reason that the speed with which information is disseminated would have an impact on market cycles. The question is what the implications may be for the way in which capital markets function and financial resources are allocated.

These questions are serious because they influence how the basic raw material of all businesses and governments - money - is distributed.

One immediate outcome of this trend is that it has exacerbated the tendency towards short termism, the inclination to reduce the horizon in which decisions are made. We know that enterprises of all kinds are making more decisions of great complexity and significance with less information in shorter periods of time. One outcome of this may be that more mistakes are made which causes the institutions charged with monitoring the flow of capital to become more conservative and reduce the amount of money circulating in order to minimize the impact of those mistakes.

At the same time, financial services companies are employing techniques like high speed algorithmic trading in order to enhance their competitive ability to make more decisions more quickly.

The result, so far, is that access to capital for the purposes of commerce and economic growth is somewhat more difficult unless the organization is either very large or small enough to rely on friends and family. The question is not whether this speed can be reduced, which is unlikely, but whether it can be better managed. JL

Ben Carlson comments in the A Wealth of Common Sense blog:

On a price basis it took 25 years to surpass the 1929 stock market peak as risk aversion stayed with that generation for a very long time. Following the Great Recession, the S&P 500 surpassed the previous 2007 all-time high only 6 years later in nominal price terms.

“Short-termism is the tendency to make decisions that appear beneficial in the short term at the expense of decisions that have a higher payoff in the long term.” – Michael Mauboussin

Tim Ferriss fielded some listener questions in his latest podcast one of them caught my attention: What is a trend you see developing that a lot of people are missing?
Ferriss gave an interesting answer for investors to consider. He thinks the speed with which we disseminate information is having an impact on market cycles. Specifically, that there’s an acceleration in the ups and downs of market cycles from the flow of information and its instantaneous dissemination through channels such as social media and other forms of online communication.
Think about the oil decline that’s seen the price of one of the world’s most important commodities fall from almost $110 a barrel in June to under $60 just six months later. No one really knows why the price has fallen so swiftly. Yet it’s entirely possible that people are extrapolating things they think will happen in the energy space in the future based on supply and demand forecasts and continued innovation. Combine that with quick hit decisions, leveraged speculators and, right or wrong, we’ve seen an enormous crash in an extremely compressed time frame with one of the most useful natural resources on earth.
William Bernstein, the brilliant author and investor, discussed the length of time we should see between boom and bust cycles based on market history in his book The Four Pillars of Investing. The book was published in 2002, just as markets were starting to mend from the aftermath of the tech bubble:

The Great Internet Bubble will not be the last of its kind, but if history is any guide, we should not see anything approaching it until the next generation of investors takes leave of its senses, sometime around the year 2030. If the current generation gets caught out again, we should be very disappointed, as no previous generation has been so dense as to have been fooled twice. But then again, the Boomers have shown a singular talent for gullibility, and there is still plenty of time.

Little did he know that there would be another massive crash just five years later after the real estate bubble imploded. Globalization means it’s not just a U.S. phenomenon anymore either. It was a global debt bubble that popped in 2007 and many of the countries around the world are still trying to deal with it.
Everyone wants to blame the Fed for everything in the markets these days because of their low interest rate policies, but rates were at similarly low levels throughout the 1930s and 1940s during the painstakingly slow recovery following the Great Depression. On a price basis it took 25 years to surpass the 1929 stock market peak as risk aversion stayed with that generation for a very long time (although on real return basis, with dividends reinvested, it took only four and a half years because of the severe deflation experienced at the time).
Following the Great Recession, the S&P 500 surpassed the previous 2007 all-time high only 6 years later in nominal price terms. Plus, while the peak of the market was in late-2007, over 65% of the losses from the crash occurred in just six months, from mid-September of 2008 (after Lehman Brothers failed) to early-March of 2009. It seems everything is happening at a quicker pace these days.
Earlier this year Vanguard interviewed their head of fixed income just before he retired to ask him how bond investing has changed over his three-plus decades of investing (emphasis mine):

One big difference between when I arrived at Vanguard and today is the speed of the markets. In 1981, when a news event occurred, you could sit and contemplate it. If something happened overseas, it might not affect U.S. markets, and if it did, it took a day or so. Now geopolitics is so much more important. Everything is instantaneous. We have to make snap decisions all the time without waiting.

Problems result, according to Ferriss, when the information becomes contaminated. There’s no way that everyone’s instant reactions are going to be correct. In fact, more often than not, it’s our gut instinct that leads us down the path of irrational decisions. Technology now allows irrational exuberance, misinformation and fear to spread around the world at a frightening pace.
This is why the glut of information is both a blessing and a curse. It’s very easy to access, which levels the playing field for people all around the world. And social media allows for instantaneous feedback on just about everything. The problem is when people make snap decisions without waiting or contemplating the ramifications. The world is now geared towards short-termism. Many default to an act-first, think-later mindset. When the implications of our decisions aren’t accompanied by enough time and deep thought, unintended consequences will occur with more frequency.
Many textbook relationships and historical rules of thumb have been virtually useless over the past 5-6 years following the crash. I think the speed of market cycles has a lot to do with this and it’s one of the reasons so many people have had trouble with this market environment.