A volatile market can split investors and traders in two. While some investors will adapt to a faster trading approach, high-frequency traders are in their element.
Despite the strategy of either type of trader, both would agree that there’s nothing worse than uncertainty and right now, that’s all there is. The spiralling fears around the coronavirus have caused financial carnage.
“The market had been common until 21 days ago,” Howard Lindzon, a prolific investor with more than 20 years experience in the stock markets, tells Opto.
Indeed, the S&P 500 went from being at an all-time high of $3,386 on 19 February to $2,304 on 20 March, a more than 30% fall from its record close. In the 27 days following, the US blue-chip index pared back 21% of those losses but amid a backdrop of confusion.
“Nobody knows what’s going to happen next,” Lindzon says. The financial mayhem extends beyond the stock markets too. Culturally, there’s been a very hard shift that people have had to adapt to.
“This isn't just a tragedy about the economy and people. This is maybe a 20-year tsunami,” he says, noting that there are reports of the virus potentially becoming a seasonal illness. “Behaviours at those levels change, which is going to increase volatility for a year or two years.
“This isn't just a tragedy about the economy and people. This is maybe a 20-year tsunami” - Howard Lindzon
“This volatility comes from smartphones, social media, globalisation,” and while there’s no playbook for dealing with such a scenario, it will ultimately be “the nimble that can trade this if they have a clear head”.
Dealing with market panics
The interchanging between a bull and a bear market is a common part of stock investing. So much so that the modern history of financial markets has become a chronicle of attempts to control risk.
However, no matter how isolated a market downturn event may appear, bear markets are cyclical and can arrive out of nowhere.
With over 20 years’ of experience investing in stock markets, Lindzon is accustomed to this ebb and flow in the markets. As it stands, he believes many individual investors are in the same trade. “As always in every panic, [panicked investors] come for leverage.”
As most equities fall in value, safe-haven assets such as treasury bonds are often bought up, as it is understood that they are uncorrelated with the economy as a whole, giving them a better position to appreciate. But that currently isn’t the case.
“What happens in a panic is they [bonds and stocks] become correlated and all this leverage that was in bonds is now getting unwound. I don't know how long that will last for but everything is acting and going in the same direction — down,” Lindzon says.
“What happens in a panic is they [bonds and stocks] become correlated and all this leverage that was in bonds is now getting unwound. I don't know how long that will last for but everything is acting and going in the same direction — down”
Another tell-tale sign that the market is pricing in low economic growth was when the US Federal Reserve decided to announce two emergency interest rate cuts in March that brought the borrowing rate down to near zero.
While this type of action from central banks is common, the current market dynamic is troubling to investors. Reducing interest rates can help stimulate credit to businesses, but the longevity of low rates has inflated debt to worrying levels.
“This happens in panics. The danger of panics is theoretically the system can break and create chaos.” Lindzon explains. He adds that during times of market chaos when there’s great dislocation and uncertainty, investors should look to cash. “I think people should have 50% cash by this point.”
“I think people should have 50% cash by this point”
What to watch in a post-panic market
Under usual market dynamics, investors and traders would often wait for headlines around key catalysts to start improving before jumping back into riskier assets again.
“[But] stocks do not listen to headlines, people do,” Lindzon had pointed out in a newsletter on 19 April. “Certain people reading the headlines have decided that there are stocks and areas of the economy that are and will thrive during and post-COVID [COVID-19].”
“Stocks do not listen to headlines, people do. Certain people reading the headlines have decided that there are stocks and areas of the economy that are and will thrive during and post-COVID”
Indeed, market downturns can and do spur on new trends. Food delivery businesses have seen a significant uptick since lockdown restrictions took place, for instance, earlier this year.
Biotech is seeing a large influx of big data around cures and travel restrictions have accelerated a major transition to remote-working practices that has benefited enterprise companies such as Zoom [ZM]RingCentral [RNG] and Atlassian [TEAM], which are all trading near all-time-highs as of 19 April.
“So as in every panic, there were trends that were happening, online education [for instance, that were] maybe not recognisable to regular investors but in the next 10 years these are the trends you're going to start hearing about,” Lindzon says.