The extent of the fourth quarter selloff in stocks was surprising let alone unnerving. From an all-time high of 2930 September 20th, the S&P stock index closed Christmas Eve at 2350, down nearly 20% over that span. No sector was spared.
I’m not going to spend time in this edition of Market Update to rehash trade with China or speculate on what the fed may or may not do with interest rates. I want to share an interesting take on what moved markets that, according to one source I subscribe to, no one is talking about and as such investors need to look elsewhere to understand the dramatic onset of volatility. It’s called algorithmic trading.
Reported in the Wall Street Journal January 9th, algorithmic trading is when computers are programmed with a set of rules to be followed in calculations. According to the report, research conducted on several large institutional portfolio managers found one main reason large institutional managers sell during a correction is due to………..are you ready for this? Falling prices! In other words, instead of acting on changing fundamentals, these institutional investors were largely reacting to price movements. One doesn’t need to be an astute investor to understand that even minor, small price movements can have the ability to snowball in today’s high frequency trading platforms. The report went on to say this is precisely the opposite of what long-term investors should do. Consider the following line from an email I sent to clients December 17th:
Frankly 2018 has been a difficult year for even me to reconcile with given the vast majority of companies have reported earnings beats and / or positive surprises every quarter to date in 2018.
Suffice to say the report in the Journal has helped me reconcile some of what had been puzzling me last month.
Look, I’m not oblivious to the fact there is a lot on the U.S. proverbial plate as we navigate trade and deal with a stagnate European economic recovery and slowing growth in China. In fact this past Tuesday the IMF reduced their global growth forecast for 2019 from 3.7% to 3.5%. That said, from Goldman Sachs to JP Morgan to Zack’s (the list goes on) confirm FUNDAMENTALS HAVE NOT CHANGED. Consensus 2019 U.S. GDP estimates remain positive but at an obvious slower rate. Depending on whom you read, the numbers come in between 2 and 2.5%. Furthermore, S&P earnings are forecasted to grow in the upper 7% to low 8% range. Certainly a far cry from the 20% growth of 2018 BUT STILL GROWTH.
Algorithms can be an effective tool when used as part of an orderly process. A simplified example of using algorithmic trading would be the use of trade stops and limit orders. The result of this research is, however, troubling to say the least. And that’s being kind.
…………………………………….’til next time, stay nimble, be tactical and know what you own.
These are the opinions of Randy L Miles, Sr. and not necessarily of Cambridge. They are for informational purposes and not to be considered as personal investment advice.