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The Algos are in Control as Coronavirus Fear Rattles Markets

The Algos are in Control as Coronavirus Fear Rattles Markets

February 28, 2020
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In many of my past messages to clients, I expressed concerns about being sure that investment portfolios are balanced and that investment risk is in check at all times.  During 2019, there were plenty of opportunities to take profits and protect a portfolio’s bottom line…I went so far to say that there were HUGE opportunities to ring the register and move profits into safer areas versus sky-high equities.  Now, I never recommend to get out the proverbial coffee can and pull out of stocks completely – that would not be responsible. 

But on December 19th after President Trump was impeached by Congress (boy, that sounds like ancient history, doesn’t it??) I said:  “So for Pete’s sake sell something!  Take a profit!” See the full message in our post: Impeachment Articles Are Filed. Do Stocks Care?  The advisors at Capstone were doing exactly that by rebalancing client accounts throughout the year to reduce overall relative portfolio risk.  We made a conscious and sensible decision to take profits and reallocate portfolios because we felt that the markets were stretched, not because we were predicting an epidemic.  And by doing so, we have reduced the downside capture of declines in the market this week alone in portfolios we manage.   

And here we are now in what has turned out to be a Nightmare on Wall Street in a week where markets have been absolutely obliterated losing a jaw-dropping 12%-15% in what feels like a blink of an eye.  The Coronavirus-driven sell-off in stocks has built in great levels of negativity where stocks are seeing 10 sellers for every 1 buyer…So, who’s selling?  Not me.  Hopefully not you. 

It’s the robots - they are back with a vengeance and those same cohorts that pushed stocks ever higher going into the early part of 2020 during the “melt up” have reversed course and are now putting extreme pressure on the downside.  They are completely exacerbating the move in a condensed period of time – the machine frenzy is the primary driver behind the reason that the market has gone down so much, so rapidly.  And with the combination of a buyer’s strike in stocks and powerful trading algorithms that can trade millions of shares in a split second a “global takedown” of equities is occurring around the world. 

So what should investors do?  And what do they look for going forward?  First, as I said earlier this week, running for the hills is not an investment strategy and making “all or none” investment decisions during the fastest correction on record would be a very big mistake.  Investors need to stay rational and make good decisions while focusing on long-term objectives.  As long as your portfolio is rebalanced systematically and your risk level is in check, then, realistically, we get through this and this too shall pass. 

In the meantime, simply put, there are things that we need to worry about.  Ground zero for this turmoil is a deadly virus that, in my opinion, we shouldn’t be making bold predictions about.  Is it me, or is every media reporter and news journalist now an expert in epidemiology?  I think that it’s still too early to tell, for better or worse, what will come of this potential threat.  This type of risk is not quantifiable where it can be fundamentally analyzed by some algebraic calculation and result in a binary conclusion.  That said, I am sure that economic fallout will ensue – supply chains around the world have already been disrupted, demand for products and services have, at least temporarily, seen some decline, some companies have already lowered earnings guidance for the year, and risk of at least a technical recession is on the rise.  Do those factors justify the recent drop in stocks?  I can’t be completely sure about that, but I will say that fear is a much greater motivator for changes in stock prices than fundamentals may ever be.  And with the machines in “ready, shoot, aim” mode, the volatility will certainly continue as headline risk rolls on. 

Meanwhile, here’s a provoking thought:  and dare I say this, but would buying high quality stocks during hysteria like this make as much sense as selling stocks into record rallies? Too many investors buy high and sell low and that, unquestionably, makes zero sense. 

As difficult as it seems, clients and investors need to ignore the headlines, stop fearing the market, and wait for confirmation that the crisis is averted or at least controlled.  When it is, cooler heads will prevail, the markets can calm down, and those investors and clients who don’t panic, will thank themselves. 

At Capstone Wealth Management Group, we keep our focus by investing responsibly and aiming for long-term investment success…If this market action has you spooked, we are here to address your concerns and answer your questions.  Please call us at (570) 587-7800 (office) or 888-587-7526 (toll fee).  And if you’re not a Capstone client yet, call us for a no-cost/no-obligation portfolio risk assessment and full investment analysis.  We can help!  

(The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.)