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Market Update- Dow has worst one day point drop ever! Read! February 28, 2020
Greetings and what a week to be a stock market analyst. Actually it has been an exciting (if that is the right word) three weeks. I say that because in a well-publicized move about three weeks back I sold off a huge chuck of portfolios and put out the following article:
With the Corona Virus making the main stream news, investors may be asking how much influence could the outbreak effect markets as the situation unfolds. As of this writing, over 41,000 cases worldwide have been reported with 910 deaths and 3,350 recovered. By the time you read this those numbers will have likely have vastly increased. The vast majority of cases and deaths have occurred in mainland China, the location of origin but the virus has spread to dozens of countries worldwide
The last serious virus that received worldwide attention was the SARS virus, a version of the corona virus family which broke out in China in the spring of 2003. 8,098 confirmed cases were reported with 774 deaths. Gross Domestic Product (GDP) in China fell about 1% as a result of SARS but overall markets held gains throughout the crisis with the MSCI World Index staging a gain of 21.56% in the six months following (Marketwatch).
That said there are many factors that could have influenced markets in the respective time period so conclusions are difficult to draw from the markets past performance.
Today China is a much larger player on the world stage having grown to the second largest economy in the world, behind only the United States in GDP. From the figures above, we can also see the current strain of Corona is more virulent, affecting 3 times as many people in the few short weeks since the outbreak hit the newswires. SARS compared to this strain appeared to be more deadly however, killing about 9.5% of people infected, while the death rate of this strain is about 2%.
Advance medicines and quarantine methods may have a lot to do with the lower percentages. Also interesting to note is the fact that almost all the deaths have been in China with only few deaths being reported outside of China. Being a more aggressive strain based on the number of people infected compared to SARS, just how far and how long the crisis will persist is unknown.
The fact is the virus is spreading exponentially, a reality of the nature of the beginning stages of contagious diseases as the more people that become sick, the more they themselves end up exposing other people through proximity or direct person to person contact.
As investors, we must take things into consideration both pragmatically and at the same time with foresight as to what COULD happen. Considering it is estimated that up to 42.9 million people fell ill during the 2018-2019 regular flu season, 647,000 people were hospitalized and 61,200 died, we have to put things in perspective. It’s not so much about the actual damage the illness might do to the population but more the FEAR of the virus. With fear comes less travel and less comingling by consumers which translates to reduced spending. This is what causes the real damage to economies and subsequently the markets they represent. Indeed some of the photos coming out of China of the some of the large metropolises looking like ghost towns is concerning. The fact that the Lunar New Year is also happening in China is also a problem. This popular holiday season has a bigger contribution to China’s GDP due to the massive travel and celebration the holiday usually fosters. The fact that many Chinese people are staying home will certainly put a dent in consumer statistics. Considering tariffs are also taking a dent out of China’s economic growth, this outbreak couldn’t have come at a worse time.
Concluding, if the Chinese economy falters big time, it may certainly have more of an effect on stocks worldwide than is currently being priced into the markets. Unless Corona is soon contained, a lingering presence could rattle markets long term with severe consequences being possible. Keep in mind no one can forecast market direction at any time and past performance does not in any way indicate future movements in the markets.
Then I got busy on my radio show putting out news on the possibilities of the virus effecting markets.
Here is the link to two shows I did on Corona. Click on the Link “Radio Shows”. They are free.
https://moneymanagementradio.com/
With the market participants finally waking up to what I had been saying for weeks (and other analysts were also warning) is that the market was not fully pricing in the possible effects on the world economies that a virus like Corona (also known as COVID19) could have.
Then I followed up with another article:
Few things reach to the very core of our concept of human frailty, the root of our fears and foster a feeling of complete powerlessness then something like a disease outbreak.
We have all seen at least one contagion movie and I don’t know about you but the very concept gives me the creeps. An enemy smaller than the eye can see, is mobile, stealthy and indiscriminate. It can spread like wildfire and unless you’re a hermit a million miles from any humanity, you have the chance of hitting the contagion lottery and not in a good way.
Unlike regional economic ills or political shenanigans in one country or another, a serious viral outbreak can likewise do serious damage to company earnings nationwide if not globally and thereby effect stock markets that these companies may comprise.
I have received at least a few calls from concerned clients regarding the Corona Virus event. Whereas the long historic rally we have seen and the ongoing political circus have not prompted investor concerns, the Corona outbreak has. Regardless of whether the outbreak could wreck serious havoc on the human race in general, the fear it could instill on consumers has all the makings of an excuse to crack the historic run in the stock market. Some analysts, including this one, have considered the market was looking for an excuse to correct. By the numbers, the Dow is still flirting with all-time highs and although its seemingly relentless upward march in recent months has stalled, a serious correction at least at the time of this writing has not occurred. The markets refusal to buckle in the face of this worldwide event may be a testament to the conviction by many investors the rally is for real and it will take more than the hint of catastrophe the virus threatens us with to cause investors to hit the sell button in mass.
There is no disputing economic statistics are far from anemic. Even with the warning from Apple that Corona will dent sales forecasts, so far the exuberance for stocks exhibited by investors is outweighing the fear that Corona is causing.
That said, the Corona event is far from over. Its persistence is concerning. Should the virus continue its spread and effect more countries and the people that inhabit them, eventually the markets will likely take a more serious tone to the ramifications of the consumer fear Corona is causing. Consumer fear means less mobility and person to person interaction, and that will translate into reduced spending and falling earnings for many businesses. Eventually if enough damage is done, even if the virus dissipates, the damage it will have done to balance sheets will likely translate into a falling market. Keep in mind no one can forecast market direction at any time and what direction the markets will take is anyone’s guess.
Now this week we have witnessed the worst bear market since 2008 and the worst point drop in the Dow in history! How bad was it? Even though I lightened way up on traditional stocks for clients and rotated into fixed income and metals (usually safe harbors) the last two days took these down as well. The selloff was (and still is) wide spread. Seeing balances drop and profits decreasing I proceeded to exercise in my opinion prudent money management for clients by using stop and trails.
Read here:
Can you protect your stocks from a falling market automatically?
In the world of investing, protecting profits and limiting losses is tantamount to success. The most common method of protecting your money from downside whether it be to keep profits or limit losses, may be to sell out all or some of your holdings and turn that into cash.
You could have a preset price on percentage in mind, much like going to a casino to play a slot machine and the spouse says you can’t lose more than $200. Although most people exercise good money management at the one armed bandit, far fewer people have this exit point strategy in mind when dealing with their retirement funds.
Is it wise to have an exit strategy?
One only needs to remember how it felt during the 2008/09 market freefall. Thoughts of losing it all put the squeeze on many investors grey matter and more than a few investors and advisors lost some sleep during those dreadful times.
That said, having a predetermined sell point might be a good idea in case of a catastrophic market collapse. No one can say it will or won’t happen of course.
Investors could just keep in the back of their mind a predetermined selling point. Something like if they lose a certain amount or if a stock hits a certain price, you call your broker and tell them to sell. The problem here is you might forget, lose your nerve, change your mind or worse yet, be unable to get through to your broker, which can happen during severe market upheavals.
However there is a way you can enter a sell order automatically on certain types of stocks and funds with some exceptions of course.
A “stop” order can be entered ahead of time by phone, computer or otherwise. These work by keeping your order on file and when the price is hit, the sell order is transmitted to the appropriate people in the market place who then attempt to sell your stock.
This order can be placed usually anytime and at any price you prefer. They work like this:
Suppose you have a stock that is $100 a share today and you decide you want out at $90.00 or lower. You enter your order as a “stop” order (in lieu of a market or limit order) at $90.
That order will sit for a predetermined amount of time, usually 60 days, and if the stock never hits $90 the order expires at the end of the term. If the stock does hit 90 anytime during the timeframe the stop order then becomes a market order. This means when your order hits the trade pits you get the market price for it. This also means you could get less or more than your stop price. In fast moving markets, your stop price, becoming a market order, means you get what they give you when your order hits the front of the line.
Another type of stop order is to add the word “limit” to the above order and enter a “stop limit” order.
The “stop limit “order means you want out at a certain price and will take no less than that price.
Although this sounds like a better way to go, the old adage there are no free lunches comes into play. Suppose you own the same stock at $100 a share and you enter the order under a “stop limit” (versus a stop order) at the same $90 price as before. The stock hits 90 and your order triggers. In this case, your order instructs the market makers to get you $90 but no less.
Should the market be moving fast and because your order again has to wait in line, if the stock keeps dropping, you may not get out. The market makers have their marching orders from you which are “I want $90 and no less”. If the stock hit 90, and your order triggered, but while waiting to get filled the stock kept dropping, if it now is below 90 and because you said you want 90 and no less, you MIGHT NOT get out at all, or only get partially filled.
Summarizing: a “stop” order will certainly get you out but the price you get may be below your stop price. A “stop limit” will get your price but you might not get out at all or only be partially filled.
Keep in mind during the 1000 point flash crash (August 24th, 2015) the drop happened so fast, many stop orders were filled significantly below their stop price. Keep in mind stop-limit and stop orders may not prevent losses and there is no guarantee of being filled under ideal conditions but these types of orders do illustrate some strategies that many investors might not be aware of. Contact your local financial professional for more information on protections strategies that may be available to you.
Concluding, I am doing almost daily update videos on YOU TUBE.
You can join my channel here and watch them all and watch them as they come out.
https://www.youtube.com/channel/UC0CLNDjNzUx85EAzobh4AoA?view_as=subscriber
If you or anyone you know need a better way to manage portfolios so sell offs like this don’t do too much damage, please pass them my number here (530) 559-1214. If watching the markets fall along with balances is causing you to lose sleep, give me ring. I always go by Warren Buffets two rules as best I can:
Rule 1- Don’t lose money
Rule 2- Don’t forget rule on
‘Watching the markets so you don’t have to”
Marc
