Monday, October 20, 2014

U.S. equity market depth and transparency is a double edged sword

It was suggested here last week that, given the market turmoil, investors would gravitate toward the U.S. equity market with its relatively reasonable valuations, transparency, and an appreciating currency.  In even the somewhat short and medium term that is absolutely believed to be a true statement, but in the immediate short term it apparently was not.  The liquidity that the U.S. market represents put it into the position of being a source of funds, leading to broad selling.

For example, as investment management institutions in Edinburgh, London, and Amsterdam, the three biggest European countries of buyers of U.S. equities, saw redemptions of their funds from both individual and institutional investors last week, they obviously looked to raise cash.  Looking at their European holdings they would have seen unpredictably declining prices, especially for any lots of size, and looking beyond at emerging markets positions would have been worse.  The one place to logically sell with the least unpredictable downside was the U.S. equity market, where they had holdings.  Selling there was not a research based decision, but one based on the cheapest access to liquidity at a time when it was needed.

The net effect was that U.S. stocks not only declined due to pressures based on the perception of slowing global growth but also due to pressures elsewhere that could be mitigated by the liquidity of the U.S. market.  Perhaps that's a positive marker for this week.


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