March 16, 2020 was the day when Covid got very real for market investors. It was the week everyone realized that we would be in for a prolonged shutdown.
When the S&P 500 fell 7% shortly after the open, circuit breakers kicked in and halted trading for 15 minutes. It was the third circuit breaker halt in a week, after similar halts on March 9th and 12th.
The Dow industrials dropped 12.9%, the second biggest percentage loss post WWII (after 1987’s 22.6% drop).
The S&P 500 dropped 12%, its third biggest percentage loss.
The Nasdaq dropped 12.3%, its largest percentage loss ever.
The world is a very different place since then.
The S&P 500 would not bottom until March 23rd, a week later. From the February 19th, 2020 high to the March 23rd bottom, the S&P would decline about 34%.
Then, almost as quickly, the market reversed. By August, the S&P was back to its old highs.
How the Fed changed the world
For Jim Paulsen at Leuthold, it was simple: the Fed and the government went big. Very big.
“Investors sell ‘fast and big’ and policy officials act ‘fast and big’ to save the world,” Paulsen told me. That week, the Fed instituted a massive monetary stimulus program, cutting rates almost to zero, and unveiled plans for massive asset purchases.
A new era of hyperkinetic trading
A lot of other things about investing has changed in the last year. I surveyed a group of stock traders on what they have seen change the most.
For Jim Besaw, chief investment officer at GenTrust, it was the realization that market had entered some kind of hyperdrive: “Everything we previously believed would take months to happen now was going to happen in a matter of days/hours.”
Others noted that investor behavior had almost become more hyperactive. Many cited dramatic moves in thematic tech investing (cyber security, social media, clean energy), SPACs, bitcoin, and microcap stocks.
While fortunes are being made and lost in the blink of an eye, it is troublesome to many old-school traders.
“There is so much $$ [money] sloshing around now which will have its own impact,” Will McGough from Stadion Money Management told me. “You could argue the rise of crypto and SPACs are just vehicles to absorb all the new money.”
Mike O’Rourke at Jones Trading agreed: “By having an exceptionally accommodative policy coming into the pandemic, the FOMC had to respond with record levels of asset purchases to supply liquidity during the crisis. The Fed has supplied so much liquidity that it has created multiple concurrent asset bubbles.”
The Fed is now the big worry for markets
Indeed, today’s Bank of America/Merrill Lynch survey of Global Fund Managers showed a startling turnaround: a majority of traders now believe that inflation and a Fed reversal of low rates is the greatest risk to the stock market, supplanting Covid worries, which had been the No. 1 risk since February, 2020.
Matt Maley at Miller Tabak cautioned that what the Fed can give, it can also take: “We should have learned that the Fed tends to be much more accommodative when the market is down (and cheap)…and tends to move to a less accommodative position when the market is up (and expensive).”