The Zigzag Week That Was

A wild week for the stock market has ended—slightly better than it started, but on the heels of enough volatility to leave nerves plenty rattled. Indeed, as Bloomberg reported, “investors pulled the most money from global stock funds since 2008,” as worrisome economic news “prompted a flight into cash and gold.”

Peter Drucker viewed the animal passions of the world’s exchanges warily, and he would have been likely to note that even though this week’s market swings were triggered by certain specific events—Standard & Poor’s downgrade of Treasuries and the deepening European debt crisis—other forces invariably contribute to the gyrations.

Image credit: US Library of Congress

One such force is excessive attention being paid to the wrong things. In an interview with the Academy of Management Executive, Drucker lamented today’s “exclusive emphasis on quarterly figures, the overemphasis on stock price, the well-meant but idiotic belief that executives should have major financial stakes in the company,” among other ailments influencing the ups and downs of the market.

Another force are the pools of money controlled by pension funds, which likewise have taken a huge hit this week. Fund managers, eager for clients, are overly geared toward coming up with respectable short-term numbers. “What American asset management today suffers from is ‘excess of competition,’ Drucker declared in The Pension Fund Revolution. “It has become so competitive and so volatile that the participants outdo each other in promising miracles to ‘beat the market.’…Pension funds cannot beat the market—they are the market.”

A third force is the instant flow of global cash from one asset class to another. “The only true sovereigns in the world economy now,” Drucker wrote in Managing in a Time of Great Change, “are the global money markets—fickle, volatile, prone to panic, uncontrolled and uncontrollable.”

What do you make of this week’s stock market volatility? Is the roller-coaster ride likely to last, or will things start to settle down—and, either way, why?