Stocks and coronavirus
A deadly virus is spreading. We don't know how large the death toll will be. Let's deal with what matters. Money. Because you come to my blog for warmth and that touch of human kindness, right? Just not the touching of one's face. Stop that. Now you want to touch your face, don't you?
So, that stock market. Crazy, right? For reference, on February 19, the S&P was at 3386. A couple of days later, it started the COVID Collapse. Friday, it dropped to 2972. That's a lot of money that disappeared. And I do mean, "disappeared." Nobody stole it. It just vanished into everyone's imaginations. We collectively decided that it simply doesn't exist.
And since liberals hate money and think that money is EEEEVIL!!!, that must be a good thing, right? Have fun trying to buy your groceries with hugs, particularly in the COVID-19 era.
Anyway, there were also two pretty significant spikes. There was a clear movement upward in the S&P when Sanders's campaign collapsed, because investors saw Sanders as such a disaster for the market. (For some reason, investors thought he might actually beat Trump, which... no.) That was mainly Wednesday. Thursday and Friday, the market went right back down.
OK, so this is interesting. How much is a stock worth? It is worth as much as people are willing to pay for it. Stock investors get nervous, decide they want to convert their assets to cash. They rush to convert their assets to cash, which means that there is a rush to sell, the market is flooded with offers to sell because people are suddenly more interested in cash... and why? Because they expect prices to go down. It's all circular. Collectively, investors all decide that they have less money.
So imagine this. Everyone gets together and holds a vote to say, "we now all have less money." It sounds crazy when you put it that way, but that's what's happening.
But, stocks have something else. They are part ownership of a company. If the company is about to become less valuable because of an economic slowdown, your part-ownership becomes less valuable. If people stop traveling, airlines become less valuable. If people stop going out to eat, restaurants become less valuable.
Then, you get second-order effects when those companies have layoffs, and so on.
However, what's happening goes beyond that. "The efficient market hypothesis." Short version: over time, the market will tend to converge to pricing assets at the correct price. That does not mean that at any given time, the price given by the market is the right one, but over time, the market will tend towards correct pricing. How efficient are markets? Ummm... Well, you've heard of bubbles, right? They are a challenge to the efficient market hypothesis, along with crazy, inexplicable moves in the stock market.
This? This is explicable, with the question being the magnitude. Coronavirus will do economic damage. How much? I have no idea. Neither do you. The question is, do investors? So far, over the past couple of weeks, their investment decisions look very much like panic. That could be overreaction, and it could be under-reaction. That's a question, not merely of economics, but of epidemiology, in which none of these people are trained.
From their perspective, though, think of the costs of overreaction and under-reaction. If you over-react and pull your money out too soon, what happens? Let's say you pull your money out at a 10% drop in the S&P. Well, compared to what? If you are a trader, let's say you lose 10% as opposed to waiting for the bounce-back, which would have made you whole. On the other hand, what if this really is 2008 all over again, and you're staring down the barrel of a market collapse? You kind of see the range of possibilities, and from a trader's perspective, maybe it's worth the risk of taking that 10% haircut. Maybe. After all, we don't really have a sense, epidemiologically/economically, of what's going to happen, in my estimation, and I've tried to parse this stuff.
Now, if you are a long-term investor, which you should be, what should you do? Sit tight. Don't make any moves. You don't know what's going to happen, and your asset allocation should have already been set based on your expected cash needs before coronavirus hit. Were that the case, this wouldn't affect you. Had your assets been allocated appropriately as a long-term investor, you could look at this and say, "well, I don't know what this will do, but I have all the cash I expect to need for the short term, and in the long term, this'll bounce back anyway." People who try to time the market get screwed.
The extent to which the market movement goes past the efficient market hypothesis, then, can include a number of factors. There are people who should be following that latter strategy, but aren't. That dumps a lot of stocks onto the market. That lowers the prices. And beyond that, let's be blunt about the fact that scared people don't act rationally. I'm going through this in terms of rational investment strategy, but not everyone is thinking of this in terms of investment strategy. Scared people make mistakes.
Of course, most trading is done algorithmically, and computers don't get scared, per se. However, when people get scared, and act afraid, the algorithms have a variety of potential responses, and potential feedback loops, since market trading includes algorithms trading with each other.
This is a significant part of what is happening in the market. Is the market pricing assets correctly now? That's not actually what the efficient market hypothesis says, even if one tries to defend it. The hypothesis says that the market will, over time, converge to correct asset pricing. And right now, nobody knows enough to do that. Eventually, this'll settle, but acting out of fear is generally a mistake.
Fear makes people act irrationally. That is why I preach the value of math. Do the math. Calm down, wash your hands, don't sell your stocks in the middle of a crash like a damned fool, and in all things, don't "trust" in math because math makes "trust" irrelevant. That's the point.
The Buchler-Gekko Rule, especially applicable here: The point is, ladies and gentlemen, that math, for lack of a better word, is good. Math is right. Math works. Math clarifies, cuts through...
The math says you put your money in a passively managed S&P index fund, or some similar strategy, and leave it there. The math says any one person is unlikely to die of coronavirus, especially if you mitigate the risks with basic precautions (and have already mitigated such risks with a healthy lifestyle). Funny how the people who devote their lives to the mathematics of stocks are the ones who FREAK OUT at the slightest provocation.
Yes, there is a particularly virulent strain of a coronavirus spreading. It is a bad one. That does not mean you freak out. You want to freak out about something? I'll throw you a bone. Climate change. You have my permission to freak out about that. This? No.
Since I'm writing about fear, and I do a lot of blogging about science fiction, you expect me to quote a certain classic, don't you? Don't you? OK. Fine.
So, that stock market. Crazy, right? For reference, on February 19, the S&P was at 3386. A couple of days later, it started the COVID Collapse. Friday, it dropped to 2972. That's a lot of money that disappeared. And I do mean, "disappeared." Nobody stole it. It just vanished into everyone's imaginations. We collectively decided that it simply doesn't exist.
And since liberals hate money and think that money is EEEEVIL!!!, that must be a good thing, right? Have fun trying to buy your groceries with hugs, particularly in the COVID-19 era.
Anyway, there were also two pretty significant spikes. There was a clear movement upward in the S&P when Sanders's campaign collapsed, because investors saw Sanders as such a disaster for the market. (For some reason, investors thought he might actually beat Trump, which... no.) That was mainly Wednesday. Thursday and Friday, the market went right back down.
OK, so this is interesting. How much is a stock worth? It is worth as much as people are willing to pay for it. Stock investors get nervous, decide they want to convert their assets to cash. They rush to convert their assets to cash, which means that there is a rush to sell, the market is flooded with offers to sell because people are suddenly more interested in cash... and why? Because they expect prices to go down. It's all circular. Collectively, investors all decide that they have less money.
So imagine this. Everyone gets together and holds a vote to say, "we now all have less money." It sounds crazy when you put it that way, but that's what's happening.
But, stocks have something else. They are part ownership of a company. If the company is about to become less valuable because of an economic slowdown, your part-ownership becomes less valuable. If people stop traveling, airlines become less valuable. If people stop going out to eat, restaurants become less valuable.
Then, you get second-order effects when those companies have layoffs, and so on.
However, what's happening goes beyond that. "The efficient market hypothesis." Short version: over time, the market will tend to converge to pricing assets at the correct price. That does not mean that at any given time, the price given by the market is the right one, but over time, the market will tend towards correct pricing. How efficient are markets? Ummm... Well, you've heard of bubbles, right? They are a challenge to the efficient market hypothesis, along with crazy, inexplicable moves in the stock market.
This? This is explicable, with the question being the magnitude. Coronavirus will do economic damage. How much? I have no idea. Neither do you. The question is, do investors? So far, over the past couple of weeks, their investment decisions look very much like panic. That could be overreaction, and it could be under-reaction. That's a question, not merely of economics, but of epidemiology, in which none of these people are trained.
From their perspective, though, think of the costs of overreaction and under-reaction. If you over-react and pull your money out too soon, what happens? Let's say you pull your money out at a 10% drop in the S&P. Well, compared to what? If you are a trader, let's say you lose 10% as opposed to waiting for the bounce-back, which would have made you whole. On the other hand, what if this really is 2008 all over again, and you're staring down the barrel of a market collapse? You kind of see the range of possibilities, and from a trader's perspective, maybe it's worth the risk of taking that 10% haircut. Maybe. After all, we don't really have a sense, epidemiologically/economically, of what's going to happen, in my estimation, and I've tried to parse this stuff.
Now, if you are a long-term investor, which you should be, what should you do? Sit tight. Don't make any moves. You don't know what's going to happen, and your asset allocation should have already been set based on your expected cash needs before coronavirus hit. Were that the case, this wouldn't affect you. Had your assets been allocated appropriately as a long-term investor, you could look at this and say, "well, I don't know what this will do, but I have all the cash I expect to need for the short term, and in the long term, this'll bounce back anyway." People who try to time the market get screwed.
The extent to which the market movement goes past the efficient market hypothesis, then, can include a number of factors. There are people who should be following that latter strategy, but aren't. That dumps a lot of stocks onto the market. That lowers the prices. And beyond that, let's be blunt about the fact that scared people don't act rationally. I'm going through this in terms of rational investment strategy, but not everyone is thinking of this in terms of investment strategy. Scared people make mistakes.
Of course, most trading is done algorithmically, and computers don't get scared, per se. However, when people get scared, and act afraid, the algorithms have a variety of potential responses, and potential feedback loops, since market trading includes algorithms trading with each other.
This is a significant part of what is happening in the market. Is the market pricing assets correctly now? That's not actually what the efficient market hypothesis says, even if one tries to defend it. The hypothesis says that the market will, over time, converge to correct asset pricing. And right now, nobody knows enough to do that. Eventually, this'll settle, but acting out of fear is generally a mistake.
Fear makes people act irrationally. That is why I preach the value of math. Do the math. Calm down, wash your hands, don't sell your stocks in the middle of a crash like a damned fool, and in all things, don't "trust" in math because math makes "trust" irrelevant. That's the point.
The Buchler-Gekko Rule, especially applicable here: The point is, ladies and gentlemen, that math, for lack of a better word, is good. Math is right. Math works. Math clarifies, cuts through...
The math says you put your money in a passively managed S&P index fund, or some similar strategy, and leave it there. The math says any one person is unlikely to die of coronavirus, especially if you mitigate the risks with basic precautions (and have already mitigated such risks with a healthy lifestyle). Funny how the people who devote their lives to the mathematics of stocks are the ones who FREAK OUT at the slightest provocation.
Yes, there is a particularly virulent strain of a coronavirus spreading. It is a bad one. That does not mean you freak out. You want to freak out about something? I'll throw you a bone. Climate change. You have my permission to freak out about that. This? No.
Since I'm writing about fear, and I do a lot of blogging about science fiction, you expect me to quote a certain classic, don't you? Don't you? OK. Fine.
I must not fear. Fear is the mind-killer. The little-death that brings total obliteration. I will face my fear. I will permit it to pass over me and through me. And when it has gone past, I will turn the inner eye to see its path. Where the fear has gone there will be nothing. Only I will remain.
Comments
Post a Comment