Confidence Is Shaken

Yesterday, volatility (in stock markets) jumped to levels not seen since September of 2016 (pre-election) and before that, all the way back to 2012.

Clearly, that was not as much fun (for many) as those folks in the photo are having. The computer generated "algo" trading jumped in mid-afternoon, just in time to fill all the "stop-loss" orders at pre 2018 prices. That manifestation took about 10 minutes or less to drop the Dow Jones Industrial Average by about 800 points. The swings may get more violent before volatility eases up.

But, despite some buying that followed, the technical damage has been done to the market.

Investors who borrow to invest (which is at record levels per the chart above) now face margin calls that require them to put up more cash against their purchases as prices have declined so significantly. In other words they are going to have to sell something to raise cash. That selling could exacerbate the current volatility.

Further,  all the buying done in January is "offside". Those investors are going to be very nervous.

Human behaviour (behavioural finance) becomes pretty important in these instances. We humans hate losses. So much so, that we tend to want to sit on a bad situation and hope that it gets better. We are very patient to wait for losing positions to at least get back to even. In all likelihood this could "trap" all those investors who were late to the party and will sit and wait until they can no longer take the pain. 

Even if there is new buying into the correcting markets, there is now likely going to be good selling if and when markets get back to January levels as those investors who bought in January get an exit opportunity.

We have probably seen the highs, at least for some time to come.

A note to clients reading this blog: While you are not completely immune from the devastation wreaking havoc on stock investors (unless your exposure to equities is zero), you are limited to your exposure because we have been and are under-weight the equity asset class, so the impact is minimal.

I have reached out to a number of you directly, but feel free to get in touch to discuss your situation specifically, if you wish.