Coronavirus-driven panic selloff: Why and what to do after

Due to the continued fears from the coronavirus, global financial markets suffered one of the strongest and fastest corrections I have seen in my 15+ year investment industry experience. The big question we all need to ask is: was this correction warranted?Let's look closer together but first let's look at market performance last week:

Last week almost all asset classes sold off. The U.S.’ stock market (S&P 500 Index) was -11.49% last week and -8.56% year to date. European stocks (Euro STOXX 50 Index) faired poorly as well -12.39% last week and -11.10% year to date. In Asia Hong Kong and China stocks sold off a little less with the Hang Seng Index and CSI 300 Index -4.32% and -5.04% last week. Even safe assets like gold was -3.51% last week.

In comparison AQUMON’s portfolios are -1.92% (conservative) to -8.13% (aggressive) this past week and -0.91% (conservative) to -7.40% (aggressive) year to date. Through systematic diversification and risk management, we saw AQUMON clients weather this volatility relatively well considering this was the biggest weekly market correction since the Global Financial Crisis (GFC) in 2008.  

Our solid defensive all-bond portfolio investment was +0.16% last week and +0.95% year to date.  

So why did the market selloff that quickly last week?

There are 2 overarching factors that are driving markets right now:

1) Rise in investor fear and reduction in investor confidence

2) Technical buying/selling

Rise in investor fear and reduction in investor confidence

There are few things going on that changed in the past 1-2 weeks particularly when looking at the US markets. About 1-2 weeks ago U.S. investors were honestly too optimistic because the coronavirus seemed so far away here in Asia. Last week suddenly U.S. investors priced in the possibility of a full-on coronavirus driven recession and assets sold off significantly.

As a reference when looking at the U.S.’ ‘fear index’ (VIX index) you can clearly see it spiking up historical high levels of 40.1 not seen since the mini-recession in 2015. 

Here you see how current VIX levels compare to the height of the GFC the index was at 80.1.

Is this warranted? With less than 100 cases in the US and 1 death will the coronavirus truly derail the world’s largest economy into a recession is still yet to be seen. Yes, we are already starting to see manufacturing and corporate earning figures reduce but as we mentioned on Friday in our Market Insights what we are closely watching is how this impacts the U.S. on a human and business level before we make an educated decision. 

A trigger that further chipped away at investor confidence is that many investors suddenly realizing that monetary policy stimulus from central banks might not be particularly effective against a potential virus outbreak. This makes the coronavirus vastly different from past situations like the 9/11 attack or GFC where it was easier for central banks to backstop the market and potentially even uplift the market. Asian stock markets today (Monday) are rebounding 1-2% on the news of a ‘rescue’ from multiple central banks but their impact remains to be seen. 

It’s honestly too early to tell but this recent correction feels ‘early’ given the situation is still developing. We’ll continue closely monitoring the situation.

Technical buying/selling

During this past market correction, there has been quite a lot of talk about technical driven selling speeding up and deepening this correction last week.

One thing as investors we often don’t take into account is how much the ‘way’ we trade investments has changed over time. In the past 10 years since 2008’s Global Financial Crisis (GFC) our financial markets are much more influenced by algorithm/quantitative based strategies and also the enormous exchange traded funds (ETF) markets. Let me explain.

By the time most of us read these eye-catching financial news headlines markets have actually moved significantly. Why? During the day traders and automated investment strategies are reacting immediately to ‘tape’ or technical readings which most of us don’t have access to or don’t know about. These readings, for example in simple terms may look at large ‘limit orders’ for a specific stock (indicating at what price people are willing to buy a certain stock).

This gives hints to traders in terms of what prices levels there may be strong buying/selling resistance for a specific stock. It’s similar to reading the market’s ‘pulse’ to determine its ‘health’. Once these intra-day readings hit, automated algorithms immediately react followed by human traders may further pile on driving the market. As regular investors we are more often than not the ‘last dog at the bowl’.

Secondly with the mass adoption of ETFs (versus mutual funds) this means money can enter and leave the market a lot quicker than before which adds to the speed of a market correction. Although these things existed in 2008 technical buying/selling influence our markets a lot more than they used to and further added to the selloff last week.

Dollar cost averaging versus buying on dips

A number of you read my last Market Insights and asked me how to strategically buy in this current market environment. I wanted to clarify this. There are often two simple ways to approach this (both have their merits):

1) Dollar cost averaging:

This is an investment strategy in which an investor places a fixed dollar amount into a given investment on a regular basis. For example, investing HK$10,000 at the beginning of each month. The investor doesn’t really care if the market is going up or down but continues to invest because they believe the power of long term investing and power of compounding returns. This has shown to be effective particularly for investors who understand the difficulty of market timing, don’t have market views (less experienced) or don’t have time and just want to keep things simple.

2) Buying on dips:

This similar to dollar cost averaging in that an investor may also may periodically invest but only after the asset has declined in price. So there is an element whereby the investor has a market view that the sizable correction is coming and you need to ‘time’ it well for it to be effective.

Key difference:

When looking at the U.S. S&P 500 Index since 1920 dollar cost averaging (DCA) has outperformed buying on dips over 70%+ of the time. The key difference is due to the fact that:

A) Stock markets have in generally traced up so while you are waiting for the next sizable pullback chances are you already lost out on the upside and

B) You really need to time the bottom perfectly (which statistics has shown to be extremely difficult) or else buying on dips more often than not statistically speaking is not as effective.

But things are often not so binary. If you have some extra cash you already allocated for investing and believe in long term investing we are a fan of putting small portions of money into the market when you believe the market is trending down to systematically reduce your portfolio’s average cost. You can do this alongside periodic dollar cost averaging investing for a little added ‘juice’ to your portfolio.  

Thank you again for your continued support for AQUMON, stay safe outside and happy investing!

Ken

About us

As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.

AQUMON’s parent company Magnum Research Limited is licensed with Type 1, 4 and 9 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC.

AQUMON’s investors include Alibaba Entrepreneurs Fund, Bank of China International and HKUST.

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