25 March 2020Asset management analysis

Viruses and volatility

March 19 marked the one-month anniversary of the markets hitting all-time highs on February 19, 2020. In that one month, here was the performance of the major stock indices: DOW down 34.6 percent; S&P 500 down 31.4 percent; NASDAQ 100 down 30.0 percent

Simply put, a bear market, which is defined as a market that declines 20 percent or more from a highwater mark, developed faster and harder than ever before in history. There are probably many reasons for this. Let’s briefly compare the 2020 bear market to other bear markets over the last 50 years (Figure 1).

Figure 1: Comparison of bear markets over 50 years

The second-fastest developing bear market came in 1987, and took more than twice as long to give up the gains as has occurred this year. Other recent bears took ~100, ~250, ~400, or more than 600 days to develop.

This has a few implications, not the least of which is that there was no way to avoid getting swept into the downdraft in 2020. Markets were selling off, or bouncing back, with moves of 8 to 10 percent, almost daily.

There is no question that markets react faster to news and data than in the past. And there is no question that news and data are delivered faster to individual investors, money managers, and, more importantly, the computer algorithms. In recent years algorithms have been responsible for roughly 80 percent of market volumes of trading.

Why is this happening? Or, perhaps the question should be: how is this happening?

Most of us carry around a personal computer in our pockets. Smartphones push new stories, Tweets, and social media feeds to us, 24/7. In the case of the coronavirus pandemic, every new infection and every death has been tweeted directly to our phones, and we are all obsessed reading this.

Social media are exacerbating this problem—and market selloffs—with disinformation and disturbing videos of suspect provenance. Many of these are of Russian and other foreign origin.

“Times like these require a steady hand, holding on to your investments and judiciously buying when there are opportunities.”

Recommendation: if you haven’t done so already, minimise binge-watching each headline and Tweet. If every death from the seasonal flu, which has killed over 10 times as many people this year as COVID-19, was tweeted out globally, we would all be under our desks or beds hiding for dear life.

This also happens to be the four-month anniversary of the very first infection in China. According to China Post, that event occurred on November 17, 2019.

China went from “patient zero” to full epidemic to “zero new infections” as of March 19, 2020, in a period of four months and two days—121 days. Before locking down, China did everything wrong: it denied the virus existed, and even jailed the doctor that discovered it. It did virtually nothing for more than six weeks as the virus spread unabated.

The US was closed to travellers from China at the end of January. Infection rates are rising in the US, as they have in other countries, albeit more slowly, as we have been working on this almost from day one. At some point, infections will peak. Sometime after that, we will get to “zero new infections”. If we follow the path of China, that date would be May 31. We will see how close we come to that date.

Globally, we need to establish a treatment protocol to compare different drugs and provide everyone with a treatment, instead of using a placebo. This is happening on some levels already. According to the press, and our analysts, China is having some successes with some antiviral drugs and other existing medicines that are commonly used for other coronaviruses.

Gilead’s remdesivir seems to have some effect, and appears to be close to approval for COVID-19. Others are being tested: some influenza drugs and an antimalarial seem to have some helpful qualities.

Early in the spread of coronavirus, there appeared to be a lack of political will to aggressively reduce the numbers of infections. The tide seems to have turned on that front as well: governments from Italy and France to the UK and the US are doing that right now.

The unknown is how many deaths will ultimately result from the virus. Based on the number of deaths we have seen so far, it seems likely that total deaths will be far less than the worst-case scenarios that have been suggested. Global governments are doing quite a bit to “flatten the curve” of infection rates, while hospitals are ramping up readiness procedures.

Back to the markets

In times of stress, such as we have experienced this year, you typically see people and institutions sell stocks and buy US Treasuries and gold. That is exactly what we saw post the market peak on February 19 until March 9, 2020.

Then something happened: all the computer algorithms kicked in and started selling everything. Stocks cratered, bonds sold off and gold fell over $200 per ounce. Simply put, the only thing that was going to satisfy the algorithms was going to cash.

If there has ever been a time to make the case for NOT owning “beta” (index funds such as the S&P 500, or bond funds) we now have a real-time poster-child example. Rising tides may lift all boats, but falling tides washed away market gains generally much faster than has occurred in managed equity, hedged equity, and managed fixed income portfolios.

Our strategist here has a mantra: know what you own, and why you own it. Times like these require a steady hand, holding on to your investments and judiciously buying when there are opportunities. And there ARE opportunities.

Figure 2: S&P 500 Index

Looking at Figure 2, we believe we see a bottom on S&P 500 at 2,346. This is important.

Our technical analyst, Ari Wald, puts it best: “We believe a multi-week to multi-month basing attempt is needed to give the proverbial all-clear, especially given extreme VIX (volatility) readings.

“Still, the S&P has now reached an 18-month low, on par with cycle bottoms in February 2016 and December 2018. In addition, we’re encouraged this was set with a key reversal at 2,346 (December 2018 low) yesterday (March 18).”

Markets are currently in a capitulation phase, where selling accelerates. Eventually the selling slows, and finally it stops. That will be the time where more reasoned investors, and even the algorithms, will stop selling and start buying again.

Until that time, keep the seatbelts fastened, practise social distancing and stay healthy.

Jack Meskunas is executive director of investments at Oppenheimer. He can be contacted at: