One factor I haven't seen written about much in explaining the wild day-to-day gyrations we have been seeing in the stock market is target-date retirement funds. The New York Times recently reported that there is more than $1 trillion in workplace retirement plan money, 21% of the total, in target-date funds, up from $185 billion in 2009. The Wall Street Journal put target-date funds at $1.1 trillion, up from $158 billion in 2008.
Say you run a target-date fund aimed at people retiring in 2040 that is supposed to be 50% in U.S. stocks. Then suppose we have a day like Friday when the stock market is up more than 9%. All of a sudden, your stock allocation is over the target. You've got to sell to get back down to the 50% level.
For an individual investor or an institution this periodic "rebalancing" can be a healthy thing because, ideally, it helps force you to sell expensive things and buy bargains. But it's one thing to do that annually or even quarterly. It's another thing to do it daily. You might think that for the market overall this would have some kind of stabilizing effect, because it forces buying by these funds after stock prices slide (relative to bonds, which are usually the other piece of these funds) and selling after stock prices soar.
There are plenty of other factors influencing markets now, and for most people and institutions, the day-to-day swings matter much less than the trends over months, years, and decades. But it may be at least a bit reassuring to know that at least some of these wild day-to-day up and down swings have less to do with dramatically new information about the underlying prospects of the economy or future corporate earnings, and more to do with these funds getting their portfolios back in line with their asset allocation plans after the previous day's wild gyrations.
The funds have some flexibility built in about how exactly they meet the allocations on a given day, so I'm oversimplifying some in describing how this happens. But it's a piece of the story, roughly a trillion-dollar larger piece of the story than in 2008.