Learn Spanish (Latin America): El mercado es menos estable de lo que pensábamos. - The market is less stable than we thought.

In Spanish, when you make a comparison and the second part is a clause with a conjugated verb (like pensábamos), you use de lo que instead of just que. You would only use que when comparing an adjective directly to a noun or pronoun, such as menos estable que el otro (less stable than the other one).

What exactly is the function of lo in de lo que?

Here, lo is a neuter article acting a bit like "the thing" or "that which." So, de lo que translates roughly to "than that which," allowing you to smoothly connect the comparative phrase to the ongoing thought you are describing.

Why is pensábamos in the imperfect tense rather than the preterite (pensamos)?

The imperfect tense is used here because it describes a continuous background state of mind or an ongoing belief you held in the past up until now. If you used the preterite, it would sound like you only had that thought once at a specific, completed moment in time.