What’s holding up in this market crash

It’s panic out there now. The S&P 500 unwound three years’ worth of gains in just 18 trading days.

At times like these, price is news; it is often the only guide investors have during a panic

Businesses are shutting in Italy after reporting the highest number of daily deaths to date, the virus has infected already infected more than 300 thousand people worldwide and economic activity has slowed as people stay home.

Global coronavirus cases as of 26 March 2020. Source: Bloomberg

As new information continues to flow in every minute, everyone is watching intensely for signs of cases peaking and some sort of stabilization. Unfortunately, looking at the curve, we are still not there yet and no one knows when that will be. The good news is most people who contract the virus recover.

Overall trend by case status. Source: NYT

That’s why markets are spooked – discounting future earnings is now an improbable task. The art of forecasting stock prices is now being made on thin air. Everybody is selling first then think later.

We are seeing a massive sell down across multiple asset classes – stocks, bonds, cryptocurrencies and even safe havens like gold.

Some airlines and hospitality related stocks have already fallen close to 70% from their highs as flights get cancelled, borders shut and people stay at home.

Investors on leverage are getting margin called, hedge funds on risk parity positions are also seeing their portfolios sliding by more than they should, and investors are fleeing the markets faster than ever before, with a record outflow even in bond markets and a 20% drop in the Dow Jones Index in just 20 days.

Weekly bond fund flows. Source: FT

But not everything is bad though. There were a few areas of strength – even in times of crisis, there are opportunities.

Safe haven currencies like the US Dollar

There seems to be a global rush to the US dollar – considered the world’s reserve currency and the safest one.

The US dollar rose sharply against the basket of currencies as the demand for US dollars globally strained liquidity.

Inverse market indexes

The Proshares Ultrashort S&P500 is one example of an inverse market exposure ETF, which can be used to hedge against market declines.

It seeks daily investment results, before fees and expenses, that correspond to two times the inverse of the daily performance of the S&P 500.

Being inherently leveraged, it is used by investors to deliver big directional bets on the market, without selling shares short and opening a margin account.

Volatility indexes

Volatility indexes such as VIX measure the expected volatility of the market by calculating the combined prices of the index put and call options for the next 30 days.

It’s a forward-looking signal of heightened levels of market volatility in the future, and the higher the VIX, the higher the level of fear.

The VIX has spiked dramatically, and investors looking to gain volatility exposure often to do it through VIX options.

Beneficiaries of the crisis

There are companies that are poised to benefit from workers working from home. One of them is Zoom – a popular video conferencing solution that has more than tripled in price since its original IPO price.

Others that fare well are healthcare/pharma/biotech stocks like Moderna, which focuses on drug discovery.

We also have retailer stocks like Walmart holding up pretty well during the crisis.

It’s interesting to see what happens over the next few weeks.

We are about 2 months into the crisis, Singapore is shutting its borders to short-term visitors tomorrow while countries like the US and UK are just starting to see the sharp rise in cases and deaths. China has already begun to get its citizens back to work and new cases have since fallen sharply, if you believe the reported numbers.

I always talk about risk management in my articles and following the trade war sell down in 2018, it’s almost always important to find the right balance of returns vs risks. You can always make less money, but you don’t really want to be losing money.

I won’t try to call the bottom to the stock market crash, because we tend to exit too late or enter too early. Predicting winners consistently is near impossible. What we can do is manage our risks, reduce drawdowns and stay invested during the rebound.

But judging from the timelines of China’s and other Asian countries’ response to the crisis and containment measures put in place, I expect western countries to see peak cases 4 to 6 weeks from today, worldwide infection count to exceed 1 million cases by the first week of April, death rates to be stable at 3-5% of cases, and life starts beginning to return to normal sometime in the middle of the year.

Of course, I am just speculating, I would be glad if I got one right.

Disclaimer: Content is provided for information only, and no liability will be accepted for any direct indirect or consequential losses or damages arising from or in connection with the use or reliance of this article’s contents.


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