Since the end of the financial crisis central bankers have been pumping cash into the system hoping to jump start their economies.
QE1, QE2 was followed by QE3 in the US. In Europe the ECB is currently engaging in their own QE, buying $22 billion a month in bonds. Despite all this cash flowing through the financial markets, liquidity (measured by the ability to buy or sell a security without influencing the price) has been declining.
According to Colin Ellis, chief credit officer for Europe, the Middle East, and Africa at Moody’s, liquidity has fallen in the Treasury, corporate bond and stock markets since the end of the financial crisis. Indeed, large company stocks have not been immune to this illiquidity.
In August of last year, for example, GE and Pepsico collapsed 20% at the open! However, there may be a silver lining here. According to Ben Levinson at Barron’s “…markets are already adjusting to lower liquidity in ways that can reward patient investors.” The 100 stocks with the highest trading volume are trading at 3.1 times book value, on average. Stocks with the lowest volume trade at just 2.2 times book value. This gap has grown in recent years.
For investors willing to tolerate volatility, they may be able to acquire some real bargains. With interest rates near zero, any strategy that can increase return even fractionally, is welcome.