So, what the ####! is going on with the stock markets?
This may not be the whole, but it is certainly a part:
· Panic selling by individuals leads to,
· Selling by money managers as they are forced to raise cash for client redemptions which,
· Then kicks in computerized trading resulting in a continuation of selling ending with,
· Forced selling to address “margin calls” for those that borrowed money to make investments.
The critical issue with the above is that it can and right now gets stuck in a constant “negative feedback loop” which exacerbates forced selling.
It is obvious that the Coronavirus served as the impetus for the panic selling. But, what could this mean longer term for the stock markets? For that, it is worth examining the impact of past global health crisis.
Of note from the above graphic, the Swine Flu (which to date had the most people infected over a year, over 60 million in the USA alone - forest green line) had the largest drop but also the highest return. We certainly do not know if history will exactly repeat itself but do feel that, as with the other pandemics, Coronavirus will come to an end and the stock markets and the economy will recover. And, we are of the belief that the Coronavirus sell-off was not only delayed but also more severe (versus past pandemics) due to the slow response time and the significant amount of misinformation during the early stages. This created the “perfect storm” for the volatile declines as markets hate uncertainty. It will be interesting to see if this will just as quickly reverse as quality data is released about both the virus and the hopeful impact of the proposed stimulus package. Also, a promising milestone today from China, no new cases in the last 24 hours.
This leads to one additional important realization. Increased volatility has a been a major part of the investing landscape since 2008’s financial crisis.
The above chart looks at the movement of a risk measuring device known as the VIX. From 2000 to 2008, there were 5 days considered to be volatility shocks, meaning the VIX increased by more than 5 points in a day. Since 2008 to now, there have been 58 days, including 3 since March 12th!
There are always multiple reasons, but we believe the greatly increased use of exchanged-traded funds and computer-based trading programs are significant catalysts.
Going forward, equity investors should expect volatility to be the norm not the exception. That said, do not allow the rapidity of information to shorten investment time horizons at exactly the time when they should be lengthened. Investors should remember what is newsworthy today may not bear any necessary relation to what is most investment-worthy over the long-term. Amazon and Apple are the same great companies today that they were in January.
So, please stay healthy, keep calm and do what you can to support your family and community.