Traders were the stock market’s engine last week. With coronavirus uncertainties now firmly linked to investor fears of possible recession, it was a perfect environment for traders to ride the push-me, pull-me trend legs.
Disclosure: Author is fully invested in equity funds: 50% index (Dow Jones Industrial Average) and 50% actively managed
The whip-saws may seem fundamentally driven, but that’s just the media fulfilling its role of attempting to label each market move with a plausible cause. For example, The Wall Street Journal’s lead article on Friday (March 6) explained the previous day’s decline with this psychological explanation: “Stocks Drop As Virus Fears Stir Volatility.”
Last week was all about volatility
The previous week (February 24-28) was clearly a selloff, with the DJIA down all five days, producing a total decline of -3,583 points. The cause? There was an overall adjustment in risk assessment for the coronavirus uncertainties. By week’s end, “panic” and “fear” had become common descriptors, but the stock market decline actually looked complete — perhaps even a bit overdone.
Last week (March 2-6) was a different story. Even as the infection news ramped up, there were no new “revelations” that worsened the previous week’s understanding and concerns. In fact, more facts emerged about the disease characteristics, thereby lessening the uncertainties somewhat.
So, in a week of ever-increasing pandemic-fear-panic rhetoric, the stock market went wildly sideways, with the DJIA ending up +455 points. The highly volatile ups and downs challenged the media, as shown below by The Wall Street Journal’s attempts to identify daily causes.
Note: Last week’s volatility does not equate to risk. It is simply the symptom of traders at work. Therefore, pay special attention to the weekly closes, when the traders close out their positions, not wanting to ride risk through the weekend.
Here are the daily moves, with the explanations that sound plausible, but likely were not causal
- Monday (March 2): DJIA up +1,294. Next morning WSJ on B-section, front page: “Dow Soars as Central Banks Weigh In.”
- Tuesday (March 3): DJIA down -786. Next morning in “Heard on the Street”: “Rate Cuts No Miracle Cure” (a reversal of the explanation for Monday’s rise)
- Wednesday (March 4): DJIA up +1,173. Next morning WSJ on front page: “Stocks Rally as Super Tuesday Results Buoy Health Insurers”
- Thursday (March 5): DJIA down -970. Next morning WSJ on front page: “Stocks Drop As Virus Fears Stir Volatility”
- Friday (March 6): DJIA down -256. For the week, the DJIA was up +455. Next morning WSJ on front page: “Virus Darkens Economic Outlook”
Below are graphs that put the noisy market moves into perspective:
The daily moves for the past two weeks. Week #1 = steady fall. Week #2 = volatile “stability.”
When trading is afoot, “trends” can turn on a dime, even in the middle of the trading day. The intraday (5-minute intervals) for the past two weeks reveals all those moves. Note that the large trader trends kept offsetting one another, confirming the willingness to Buy!, Sell!, and Buy! again.
The weekly graph from January 2018 provides a calmer perspective. It removes the noise of daily volatility, thereby highlighting both the size of the recent downward adjustment and the market’s current position relative to where it has been over the past 2+ years.
The bottom line
Despite the numerous negative reports and discussions last week, the stock market gained a bit. Why? Because the link between coronavirus and U.S. company future earnings growth has not been ascertained.
Moreover, remember that the infection numbers we are hearing are being presented as cumulative, but they should not be. As new people are infected, earlier ones recover. Therefore, dire visions such as “massive layoffs” may well be overwrought.
So… Buying and owning stocks now for future growth prospects looks to be the better approach than not owning them because of current coronavirus fears.