Someone asked me this question on Quora, and I thought it was interesting and thought-provoking. Hope you think my answer to it is interesting and thought-provoking as well!
This is a very interesting question. It deals with something that I spent several years of my life working on – how stock markets receive and process information. The orthodox view is that information is processed instantaneously and accurately by utility-maximizing market participants whose actions in aggregate always preserve a tight link between market price and economic value. This is certainly, provably wrong (despite the fact that Gene Fama has a fake Nobel in Economics for eloquently and doggedly maintaining that it is not).
I’ll split my answer up a bit into a short-term and a long-term effect and I’ll also slightly alter your question to only talk about the U.S. market. This last condition is ridiculous. If the U.S. market was shut for 6 days and all other world markets was shut for only two, capital would flow to other markets and the U.S. will become even more of a financial backwater than the post-Brexit London is likely to become (way to go, Boris).
There’s actually a sort of experiment you can run to answer your own question. Just compare market movements in foreign markets over a three-day weekend in the U.S. to how the U.S. moves when it re-opens. I have observed plenty of times when foreign markets are down heavily while the U.S. is on holiday and I figure that when NY opens up again, it’s going to be a bloodbath – even though the U.S. is a pretty insular market, news and prices do tend to propagate around the world. So, if the Far East has had a rough day, Frankfurt and London get hit next, and NY gets hit when it opens. But if NY is not open on a certain day, it wouldn’t have the opportunity to sell off.
These kinds of sell-offs – based on an unexpectedly bad release of economic data or something – are often overdone. So the next day, you’ll often see the market that originally caused the fall to bounce back again. In that case, when NY traders and portfolio managers wake up after the vacation, they see that markets are up in London and that they were up in Tokyo and Singapore the night before, so chances are good that the information from overseas will not affect NY trading as much.
So, short-term, I think that the market might be less reactive – people would focus more on longer-term issues and try to figure out what news meant in context of the longer term.
That said, if the financial markets were only open once a week, there would be a lot of transactions that would need to get done (e.g., mutual funds receive money from investors and need to put that to work, etc.), so volumes would be higher and there would likely be increased volatility in certain stocks (especially those that had some material news during the long break) because of that.
There are a lot of people under the impression that anything having to do with the two worlds, “Wall Street” is evil, and the only thing that financial speculation brings about are bloodsucking opportunists wearing French cuffs and custom suits.
There are certainly plenty of examples of unseemly opportunism on Wall Street and these are made more galling because the monetary figures associated with this opportunism is usually very great. However, there are plenty of examples of unseemly opportunism everywhere (teaching, policing, military, manufacturing, etc.) and I would maintain the social effects of these other examples may be as large or larger than those caused by Wall Street excesses.
That’s another Quora answer in itself there, but the short story is that financial markets do play an incredibly important role in the real economy, so the long-term restriction of market hours in the U.S. would, in my opinion, have a devastating negative effect on economic conditions here.
The U.S. is one of the most entrepreneurial and innovative economies on the face of the earth and the last 20 years have seen really phenomenal advances thanks to that entrepreneurship. Mobile telephony, computer technology, alternative energy, etc., etc.
All of these fields are supported by 1) good ideas and 2) investors willing to fund the people behind those ideas. Investors willing to fund entrepreneurs is a key condition that is at least as important as the good ideas themselves. Many people think that if you build a better mousetrap, the world will beat a path to your door. That’s simply untrue – there is so much that an entrepreneur needs beyond a good idea, that in the end, the good idea ends up being secondary to marketing strategy, distribution, financing, etc., etc.
If financial markets were not as active, the barriers to bringing a new technology to market would increase to the extent that many of them would not be brought to market at all. “That’s okay,” you might say, “the most important innovations would make their way to the fore, surely!”
Not necessarily. Many innovations are incremental and big steps forward can only be made after a certain number of incremental steps have already been made. Think of all the technologies that went into making the first iPhone possible. Improvements to the storage capacity of NAND Flash, miniaturization of processing components, development of accelerometer chips, etc., etc.
Even if Steve Jobs would have had in his mind the idea that he would build a handheld computer that could be also used as a phone and a toy, it would have been impossible for him to have built that thing without the contribution of thousands of small companies working hard on tiny, component innovations. They were working on those tiny component innovations because they new that if they succeeded, they would be financially rewarded and the way they would be rewarded would be – directly or indirectly – through a well-functioning capital market system.
So closing down financial markets for a long period of time would, in my view, slow advances in technology, medicine, food production, transportation, energy generation and transmission, education… the list goes on and on.
Well, I’ll close now – need to get some stuff done before the market opens tomorrow morning…