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Investors, fasten your seatbelts!

Markets are not going to slow down.
Fast and furious, up and down … information has never moved at such speeds as we see today, or at such volumes. Image: Getty Images

The speed of market movements over the last month has been almost unprecedented.

Statistics from S&P Dow Jones Indices show that in the space of just two weeks in March the S&P 500 experienced two of its ten largest daily drops ever as well as two of its ten biggest daily gains ever.

As the tables below indicate, all four of these significant movements happened between March 12 and 24 – a period of just 12 days.

S&P 500 largest daily losses
Date % move Rank
16/03/2020 -11.98% 3rd
12/03/2020 -9.51% 6th

Source: S&P Dow Jones Indices

S&P 500 largest daily gains
Date % move Rank
24/03/2020 9.38% 9th
13/02/2020 9.29% 10th

Source: S&P Dow Jones Indices

Read: Global markets lost nearly $8 trillion in value in March

The only time something like this has happened before was at the start of the Great Depression in 1929. Between October 28 and November 14 that year – a space of 17 days – the market experienced five equally substantial daily movements. On that occasion three of them were negative, and two were positive.

Even in the financial crisis of 2008, although there was some massive market volatility, the biggest moves in the S&P 500 were spread over more than two and a half months. In that year, there were five substantial daily swings between September 10 and December 1.

The moves last month were therefore extreme, and this is reflected in the local market as well. As the graph below from Cannon Asset Managers shows, the cumulative change in the FTSE/JSE All Share Index during March 2020 was the highest ever experienced.

(Click to enlarge)

A different era

For investors, a question worth asking is whether the pace of market movements in March is another once-in-a-century event, as the similar period in 1929 turned out to be. Or is it less of an anomaly, and something that markets should get more used to seeing?

In this regard, the virus that triggered the sell-off might provide an interesting analogy.

As emeritus professor of finance at the London Business School Elroy Dimson pointed out in a recent interview with The Evidence Based Investor, Covid-19 is hardly the first severe pandemic the world has faced. In the 14th century, the Black Death killed as many as 50 million people, or 60% of Europe’s population. The Spanish Flu of 1918 killed a similar number.

In the 14th century, it took around two years for the plague to move from England into other countries. The Spanish Flu took many months to travel around the world.

Covid-19, however, was infecting people across the globe in a matter of weeks.

“So, as far as we can tell, the coronavirus is far from being one of the most deadly viruses,” Dimson points out. “But international travel and factors like that have enabled it to spread with remarkable rapidity.”

Newspapers are out, social media is in

Similarly, news now flows around the world more quickly than it ever has. Global stock markets are more interconnected than they have ever been. Information has never been transmitted at this kind of speed.

This has implications for how quickly share prices go up and down, because there is a truism in investing that markets move faster than information.

So if information is moving more quickly than ever, so will markets.

“The ubiquitous nature of today’s social media and news platforms means that news or information is disseminated a lot faster than when you had to wait for your newspapers the following morning,” points out Iain Power, chief investment officer at Truffle Asset Management. “To the extent that the world now experiences shocks or catastrophes, this information spreads quickly to all corners of the world, with markets repricing and trying to discount the impact of the new information much faster than they have in the past.”

An additional complication this creates, says Power, is that there is now too much information, and it’s difficult to determine what is both true and relevant.

Read: Covid-19: Third parties can be held liable for spreading fake news

This adds to the extent of the volatility that markets can experience – such as what happened on March 12 and 13, when the S&P 500 followed one of its worst days ever with one of its best.

You’re making this happen. Or are you?

As Roland Rousseau from RMB Global Markets points out, this is what plays out when you mix markets, rapid news flow, and human behaviour.

“Capital markets are discounting machines, and they are very good at anticipating bad times such as recessions, but they over- and under-react to the news based on ‘perceptions’ and the ‘psychology’ of behavioural science,” Rousseau says.

“So if you combine faster access to information with an ‘excitable’ discounting machine, you get more volatility,” he adds.

Read: Millenials freaked out and fled risk when stocks took a dive

However, in modern markets it is not just humans who are making decisions. Increasingly, systematic trading systems and bots are processing and acting on information in microseconds.

“The speed of information that is accessed by the big quant traders and their ability to implement those trades is unbelievably quick,” says Victoria Reuvers, MD of Morningstar Investment Management South Africa.

All of which suggests that these extreme moves may become increasingly common in stock markets.

“Should we get another shock to the system, we could absolutely experience events like this again,” Reuvers says.

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COMMENTS   17

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And gold is up 35% in Rands this year. And a thousand percent in 20 years. No investment advisor recommends gold though.

What did gold do in dollar terms though?

8%. And 489%

Irrelevant to SA’ns

Unless you want to prove some point

Last time I checked bread was priced in Rands. The dollar price is irrelevant. You can’t eat forex.

Seriously!!! Your problem as confirmation bias. Check out what every other asset class has done over the last twenty years and then reconsider making stupid comments like this!

Are you saying gold is the future? No belief that hard hit stocks will recover?

I’m not predicting. My point is gold has beaten indices such as S&P and only in alternative media is gold recommended. It has been good to me and I hope it continues so. But if you hold Rands it seems to me to be a no brainer, even now.

Small gold bars in several bank vaults works for me

bit late for fastening seatbelts unless this headline was meant to be published two months ago

Boomgloom is 100% correct. Here is my story;

We were given a KR for a wedding present in Feb 1979. At that time a 1oz KR was approx R275. It is still in my safe and is selling today at R32,700 on SAgold.com = 11,791%

I believed that one needed a ‘war chest’ for the inevitable. After building my business from zero, only after 24 years did I eventually have sufficient funds to buy my war chest during 2010. It has been my best investment, even before the crisis. By Jan this year it was up by 130%. 13% annual tax free growth, very happy with that. Since mid Feb it has increased to a return of 229% = an annual average tax free return of 22.85% pa. (Cap gains tax of 10% when selling)

I also took the view that the rand was on a road to ruin, so all my investments except for my business and my home are 95% rand hedged. So, even with the crash in equity prices I am still up since the crisis.

Boomgloom says “No investment advisor recommends gold though.” Yes, especially the big boys like insurers, banks etc. I think it is an axiom that the more heavily something is advertised and promoted the less value it holds – for you.

The advantages of holding gold, physical gold, are many and obvious, but to me, running my own equity portfolio, also for approx 10 years, it has only really been doing well for the past year, as I got wiser. While I was playing the market my gold coins were lying in my safe collecting dust and laughing.

Another lesson is that with all the noise of talking heads – so called ‘specialists’ – they do not have a clue. It’s 95% speculation and opinion. There is nothing less predictable than the future but millions make a good living trying to prove that wrong. Sometimes they actually do get it right, then they are a genius and the herd follows them over the next cliff. Even a broken clock has to be right twice a day!

Here is an interesting stat; the volume traded for the ALSI was 451.08m for March 2020 (364.49m so far for April 2020). Since 2017 the average per month has been over 5.5b shares traded per month. That means that the decimation on the JSE is caused by comparably very few trades. The question then becomes who’s making the trades? Who is pushing down the JSE? Is it Joe Soap panicking and selling off? Or perhaps it’s the ones who has the most to gain from spreading fear, hoping that the uninformed will dump their shares so that the vultures can pick them up at rock bottom prices. My humble suggestion; unless you believe SA is done and will never, ever recover, just hold on to your shares. It will recover.

This is how Joe Kennedy (JFK’s father) made his fortune in 1929.

I agree. As I see it, there are only two valid reasons for holding the view that you should have sold out of SA shares before this even happened and should have sold on the way down. 1) If you hold the view that the SA economy will never recover and therefore there will not be a recovery in the share market; or 2) You are at or near the end of your productive life and have to start living off your savings. In the latter case you should have reduced share exposure some time ago and you’ll now just have to sit it out or accept that you have really lost a lot of money. In all other cases, don’t turn a paper loss into a real one. Speaking for myself, I bought Sasol in two tranches, one at R47.50 and the other at R31.20. Will it recover to where it used to be? Who knows. But at the price I bought I thought the upside potential outweighs the risk.

…Batman ….spot on …brave investors will hold on …all fairground bumper-car rides eventually end

The market will certainly recover, as long as there is intrinsic value underlying it. If not, it won’t.

Market statistics is a weird but very real eye opener. It depends fully on the data measuring points such as begin and end dates of a certain period. A month this way or that way can make the world of difference.
As I have it, the long, long term statistics of the market performance – from the decimation in 1929 up to February 2020 just before this last wipe-out, indicated that the market performance (return) was either negative or just about flat for 55 years out of that 91 year period.
That is for more than 50% of the time. After this 2020 decimation (by end of March 2020) – also since 1929, the market was either negative or just about flat for more than two thirds or 67% of the time. That is very bad odds – two against your one that you will loose out. So tell me again that underlying equities is the best long term investment vehicle?

End of comments.

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