Welcome to the new my.morningstar.com! Learn more about the changes and how our new features help your investing success.

Is Market Volatility Justified?

The stock market has historically been more volatile than corporate earnings, but uncertainty can justify that volatility.

Alex Bryan 30.08.2018

At the 2018 Morningstar Investment Conference held in Chicago, David Herro of Oakmark argued that investors often overreact to macroeconomic news, not properly evaluating their impact on a company’s future cash flows, which can create opportunities for value investors like him. Nobel Laureate Robert Shiller made a similar argument that market prices are more volatile than they should be, based on changes in future dividends [1]. That perspective is intuitive. But is it true? While the market probably doesn't always get prices right, a more careful look at historical earnings suggests that the volatility in stock prices is justified on average.

In Theory

A stock's intrinsic value is the present value of its future cash flows plus its current cash balance minus debt. These cash flows are risky because they represent the cash that is left over at each firm after all the bills are paid, including interest payments to bondholders, who get paid before equity investors. Given the large impact of cash flows on fundamental value, it might seem like stock prices should be roughly as volatile as their firms’ cash flows. But investors don’t know what those cash flows will be ahead of time and that uncertainty is a source of added volatility.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Member.

Register For Free

About Author

Alex Bryan

Alex Bryan  Alex Bryan, CFA is the Director of Passive Fund Research with Morningstar.

Audience Confirmation


By clicking "accept" I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See "Cookie Consent" for more detail.

  • Other Morningstar Websites
© Copyright 2021 Morningstar, Inc. All Rights Reserved.      Terms of Useund      Privacy Policy.
© Copyright 2021 Morningstar Asia Ltd. All rights reserved.

Terms of Use        Privacy Policy        Cookies