The first quarter of 2018 has seen the markets bouncing around like a game of Video Pong. Here are some numbers from the Dow:
January 29: down 177 points.
January 30: down 363 points.
February 11: up 410 points.
February 20: down 250 points.
There’s a word for this: “shitshow.” There’s another, more scientific word, too: “volatility.” And according to the volatility index (VIX), one of the key measures of such market wackiness, things are chaotic right now. As Larry McDonald, an analyst at ACG analytics, told CNBC:
"The beast inside the market wants to know where the bodies are buried. Where are the other volatility sellers, other victims? Any additional casualties will lead to more short covering in the VIX futures market. Other markets participants know this and may be trying to take advantage of the pain trade."
What happened to cause the market to go into body-hunting beast mode? Well, that’s where we’re left with a lot of guesses, some more cryptic than others.
“The catalyst was the fact that there was no catalyst,” explains Kevin Mak, director of Stanford’s Real-Time Analysis and Investment Lab.
Mak describes the initial huge sell-off as a correction to investors holding on tight to the gravy train for as long as they could for reasons of FOMO. “For four years, the market was going straight up. It was like, ‘I can’t believe the market hasn’t corrected yet, I can’t believe the market hasn’t corrected yet,’” Mak says. “Finally, when the market started to fall, everyone said ‘this is the top’ and started selling.”
But the speed and consistency of those ups and downs? One popular theory is that algorithmic robots, which now perform trading duties on the S&P 500, are to blame. If there is a point when this shift from man to machine occurred, it was probably in 2011 when Nasdaq CEO Robert Greifeld said, “The trading that existed down the centuries has died. We have an electronic market today. It is the present. It is the future.” The bots have only gotten more advanced in the years since.
Because these algorithms buy and sell at a much more rapid pace than their human counterparts, gains and losses occur over a shorter time span, or so the theory goes.
This technological impact on the markets is sure to be ulcer-inducing to day-traders before they get used to it, but are these bots fundamentally changing the market? Mak thinks so, but by actually making the market less volatile.
“They’re looking for long-term trends, and less the short-term, where when a stock is down ten percent, the reaction is to sell and get out before other people get out, which exacerbates them both,” says Mak, adding a caveat. “The one issue I have is that nobody’s proven that [algorithms make markets less volatile],” he says with a laugh. “But it’s a belief.”
There may also be something happening on a larger scope that doesn’t involve machines or simple market corrections.
“People are worried about macroeconomic risk,” says Larry Harris, finance chair at USC’s Marshall School.
To Harris, the volatility is linked to an economy running at full capacity, while the government signs on to borrow even more money, which are two factors leading to potential inflation and the “crowding out” effect. Harris points out that the US national debt is currently at 105 percent of GDP, compared to 110 percent when it was paying for its entry into World War II, and Greece’s 200 percent during its recent fiscal crisis.
“At some point it’s just not sustainable, and people are getting worried about it,” Harris says. “When people are uncertain about what the future is going to look like, that's when volatility gets high.”
The good news in all of this is that none of it is likely to affect you, even if you are in the dwindling population of American stock owners.
“Many of my colleagues think the market is overvalued, and I do too,” Harris says. “But for people who are going to invest for 20 years down the road, it doesn’t really matter. They’ll come out ahead.”
That’s a sentiment Mak gets behind, too.
“Whatever happened in the last three weeks is largely irrelevant,” Mak says. “The media is blowing these last few weeks out of proportion. Any investor who invested on January 1st of this year is currently up. To me, it’s a non-event.”
In other words, let the computers do their work and save the fretting for others. Anyway, if you’re truly worried about the market collapsing, what you're really worried about is the end of society, so the more apt solution is to just cut your losses and invest in a new power generator or fallout shelter.
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