17 Mar Capital 19 Catch-Up

Record volatility as stock markets swing widely

The big swings continued last week as COVID-19 and the oil stoush between Russia and OPEC dominated headlines once again. There were no small moves to be made in any session. Tuesday’s rally back from Monday’s heavy losses was the smallest, and even that was a whopping 4.84% move to the upside. On any other day, it would have been considered an amazing feat.

The Dow started its life in 1896 and it took until 1988 for it to clear the 2000 point mark. That’s just over 100 years. This week it lost more than that in both the Monday and Thursday session. It came within inches of gaining 2000 in the Friday bounce but fell just short, rising 1985 points. It was a wild week.

All of the major indices had moved into bear territory by the Wednesday session. The Dow had fallen to the 20% mark by Wednesday as the World Health Organisation finally declared a global pandemic, and the Bank of England followed the Federal Reserve’s charter and dropped their interest rate by .5% to 0.25%. The S&P500 benchmark index and the Nasdaq followed suit on Thursday as we saw Wall Street experience its biggest falls since the Black Monday crash of 1987.  

Thankfully Friday saw the biggest moves up since the 2008 GFC, with the major indices gaining back much of the Thursday losses. Markets were buoyed by Trump declaring a national emergency, which freed up around $50 billion in federal funds to combat COVID-19. The bounce-back saved the major indices from experiencing their worst week since 1987, however, it remains to be seen whether the selling is quite done with yet.  

We saw circuit breakers come into effect for the first time during the week. These were introduced after the Black Monday crash which saw 20% wiped off the value of the share market in a single session. After not being needed for the next twenty years the rules were relaxed just before the GFC hit, which wasn’t the best timing, and then reinstated afterwards after the disastrous flash crash of 2010. 

Currently, the rules state that market trading will be halted for 15 minutes once the market falls 7% from the closing price of the previous day. It will then reopen and be halted again if it falls by 13%. Lastly, if the market continues to fall and reaches a 20% slide (god forbid), all trading will be stopped for the rest of the session. All of the major indices hit their first circuit breaker levels on both the Monday and Thursday session, just after the markets opened. Luckily the trading halt slowed things down enough to prevent the 13% mark being reached in the hours following. 

Then there are different rules for the futures sessions that occur during the US night – our day in Australia. I know many of you have been watching this during the week. If the futures fall by 5% from the previous session close all trading will be halted for thirty minutes. Once it reopens it cannot be traded below that 5% mark but can go higher. This will be in force until the market itself opens. 

Today’s futures are currently “limit down” as we speak – meaning they are down 5% and will not trade lower than that until the day session starts later tonight our time. That suggests we’re in for another wild ride tonight, and there’s every possibility that the volatility will continue, with large swings in either direction. Matthew has written a couple of really interesting articles that we now have up on our website which you can find here https://capital19.com/blog/. There’s one on the risk of panic selling and another called the Pandemic Portfolio which takes you through investing in the current environment. If you have a chance, then go in and take a look. 

Just this morning the Federal Reserve has cut rates to 0% and announced they would be buying $700 billion in Treasurys and mortgage-backed securities. The fact that the futures are down suggest the markets don’t think it will make much of a difference. No doubt we will be hearing much more from the Federal Reserve throughout the week ahead. 

It is expected that the number of coronavirus cases in the US will rise again this week. Although there seems to be an increase in the vigilance being displayed from both the public and the government, and hopefully this will go some way to quelling the number of those infected.

Remember, this disease will pass eventually and everything will return back to normal – just like the share market and share prices will. There are some great bargains out there at the moment – and if we see further falls the discounts will just get bigger. If you’ve got money sitting on the sidelines you need to be getting ready to deploy it shortly. 

I’m not sure the punters will be paying too much attention to earnings that are coming out this week. But for those interested FedEx (FDX) will report on Tuesday. The global courier will no doubt have some important insights into the effect COVID-19 has had on the economy. Homebuilder Lennar Corp (LEN) will also release earnings on Thursday, and jeweller Tiffanys (TIF) will report on Friday. 

We’ll also be keeping an eye on the oil stoush/ game of chicken happening between Russia and Saudi Arabia. Both are of the opinion they can withstand the low oil prices more than the other. With any luck, they’ll both blink and get back to the negotiating table. The market would certainly love some good news.