Stock market liquidity, which offers the ability to buy or sell shares with minimal delay and minimal impact on the price, will trend sharply downward over the next decade, raising the risks for investors, per a detailed report from investment management firm Bernstein, as reported by . In a worst-case scenario, constrained market liquidity can spark a meltdown in stock prices that sets off a new 澳洲幸运5开奖号码历史查询:financial crisis. Three major recommendations from B🐽ernstein are summarized below.

3 Ways to Survive the Liquidity Crunch

• Increase cash allocations
• Avoid unduly large positions and be wary of crowding risk
• Develop active strategies to exploit the negative impact of liquidity

Source: Bernstein, as reported by Business Insider

Significance for Investors

The rationale for increasing cash allocations is straightforward. The same is true for reducing risk by avoiding unduly large portfolio positions and by being wary of crowded trades with the potential for severe selling pressure once market sentiment turns. Investors should also know how many trading days it may take to close a position in an orderly fashion, without having to dump shares at 🌺distressed prices.

Meanwhile, 澳洲幸运5开奖号码历史查询:strategists at Jefferies recently identified stocks with heavy ownership by high-turnover 澳洲幸运5开奖号码历史查询:hedge funds, as reported by CNBC. These stocks are at risk of coming under s💝udden and intense selling pressures once these funds head for the exits.

On their third recommendation, Bernstein says that the rise of 澳洲幸运5开奖号码历史查询:passive investing is reducing liquidity. While they offer no specifics, they believe that 澳洲幸运5开奖号码历史查询:active investment managers, like themselves, have the stock-picking expertise to thrive in this environment. However, a growing majority of actively-managed funds are underperforming their passive benchmarks, per research by 澳洲幸运5开奖号码历史查询:Morningstar.

Bernstein identifies five forces that are draining liquidity. First, a combination of 澳洲幸运5开奖号码历史查询:high frequency trading (HFT) and regulation have been factors spurring a drop of nearly 75% in 澳洲幸运5开奖号码历史查询:bid-ask spreads during the last 10 years, but they 💙say that volumes and turnover al🍒so have decreased.

Second, fewer investors in the public markets are driven by 澳洲幸运5开奖号码历史查询:fundamentals. Instead, investors are turning to passive vehicles such as ETFs. "It can also pressure the more liquid holdings of investors if a larger share of their assets are tied up in illiqu🌱id positions that cannotꩲ be sold," as Inigo Fraser-Jenkins, head of global quantitative and European equity strategy at Bernstein, writes in a recent note to clients, as quoted by BI.

The third and fourth forces are the reversal of 澳洲幸运5开奖号码历史查询:quantitative easing (QE) by 澳洲幸运5开奖号码历史查询:central banks such as the 澳洲幸运5开奖号码历史查询:Federal Reserve and 澳洲幸运5开奖号码历史查询:rising corporate debt. T🍷he fifth and final force is the slowing of the economi🎶c cycle.

Plunging liquidity also is a major concern of analysts at 澳洲幸运5开奖号码历史查询:Deutsche Bank. They see worrisome parallels today with the opening stages of the 2008 financial crisis and warn that a surge in market 澳洲幸运5开奖号码历史查询:volatility is a likely consequence. Marko Kolanovic, global head of macro quantitative and derivatives research at JPMorgan, foresees a "Great Liquidity Crisis" i🐈n which the disappea👍rance of willing buyers turns a stock market selloff into a full-blown crash.

Looking Ahead

A longstanding best practice for active traders is to be aware of average trading volumes and average bid-ask spreads. Trading in illiquid stocks with wide spreads is risky in normal times, let alone in times of market panic. Moreover, a trend towards lower liquidity market-wide also has ramifications for 澳洲幸运5开奖号码历史查询:buy-and-hold investors who anticip⛄ate long holding periods, since eventually the day may come when closing a position is warranted.