Turmoil Could Help Restore More Normal Markets

After enduring something of a sudden trauma last week, many market participants now wish for a rapid return to calm. That's understandable, but it may not be in their longer-term interest to simply revert to the highly unusual market conditions that prevailed before. Instead, they should hope for a new, less abnormal market paradigm with respect to asset-price volatility, correlations and certain asset class valuations, together with less extreme investor-base conditioning.

During the recent bout of intense market turmoil, the VIX measure of volatility surged from less than 14 at the end of January to more than 37 just five days later. Major stock indexes corrected by 10 percent in a few days, after more than 400 days when the S&P 500 had not experienced a cumulative 5 percent drop from its most high. And while a daily move of 100 points in the Dow Jones Industrial Average had become unusual, 1,000-point intraday journeys suddenly were almost common.