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How computerized trading exacerbates market volatility, including on a record-setting day

After several days of major losses, the Dow Jones Industrial saw its largest single-day gain ever, more than 1,000 points, as the markets reopened after Christmas. Since not much has changed in terms of policy, what’s at the root of the volatility? Investment strategist Hugh Johnson joins William Brangham to discuss how the news affects stocks and the “troubling” impact of computerized trading.

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  • William Brangham:

    Now to the day's other top story: a wild surge on Wall Street. Stocks roared back from a Christmas Eve beating, posting their best day in nearly 10 years. The Dow Jones industrial average gained more than 1,000 points for the first time ever, to close at 22878. The Nasdaq rose 361 points, and the S&P 500 was up 116.

    For some insight, I spoke with investment strategist Hugh Johnson a short time ago.

    Hugh Johnson, thank you very much for being here.

    I wonder if you could start of by telling you us, what on earth is going on with this market?

  • Hugh Johnson:

    Well, first of all, we have got some volatility, and the volatility, of course, we saw starting with the day before Christmas on Monday with a very sharp decline in the stock market, and, of course, the recovery of 1,000 points that we saw today.

    And these are — it's often just simply in response to some news that might come out, news about the economy, news about whether Chairman Powell, his job is secure in Washington as chairman of the Federal Reserve, trade tensions with China, small news, news that's important, but doesn't seem to justify the big swings we have seen in the stock market.

    But those — small news touches off some selling, which is aggravated or turned into steep declines in the market by computerized trading. And, today, we get some positive news. And that's turned into a big, big increase in the stock market, largely driven by computerized trading.

    So, computerized trading tends to take small declines, turn them into big declines, take small advances, turns them into big advances, or creates a lot of volatility in the markets.

  • William Brangham:

    It seems like the things we were talking about earlier this week, last month about what was driving the market down, the cooling global economy, trade wars, those things haven't really changed, have they?

  • Hugh Johnson:

    No, they haven't.

    And that's that's why you would have to lead — you're led to the conclusion that the declines that we saw before Christmas overstate the fundamentals or any changes on the fundamentals. The fundamentals really haven't changed a lot. The outlook for the economy is the same. The outlook for earnings is the same.

    Trade tensions between the U.S. and China haven't changed much. And the same thing is true when we have the move to the upside, as we saw today. Things have not changed.

    And the important thing to keep in mind is that these small declines or even small advances are turned into large declines and large advances largely by the impact of computer trading on the markets.

  • William Brangham:

    All right, Hugh Johnson, thank you so much.

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