Members of the Wisconsin National Guard screen residents for COVID-19 at a temporary testing facility in Milwaukee. Wisconsin currently has one of the highest positivity rates for COVID-19 in the nation. Scott Olson / Getty Images
Don’t blame a black swan for this stock market crash.
The Dow Jones Industrial Average DJIA, -2.86%, fell 900 points, or 3.3%, on Wednesday, near its session low. The S&P 500 SPX, -2.86% lost 3.3% and the Nasdaq Composite COMP, -3.00% fell 3.5%, with the three benchmarks erasing October gains.
The sell-off, which follows the slide in European stocks, puts major US indices on track for their biggest weekly decline since March, when stocks tumbled to their bearish level when the pandemic forced the shutdown of much of the economy. world. The drop comes as COVID-19 cases rise in the US and Europe, prompting further closures in Europe and prompting fears of a slowdown in activity that could derail the economic recovery from the previous shutdown.
But the pandemic never went away, and the threat of an autumn rebound in cases where cooler weather returned was long identified as a potential risk. That is far from being a black swan, an unlikely and unforeseen event that has a huge impact.
So why do investors seem surprised?
“Traders have been surprised by the rapid increase in COVID-19 cases in Europe, mainly because the background level of the infection was supposed to be low enough to avoid a cycle as bad as spring.” Jim Vogel, executive vice president of FHN Financial, said in a note.
Instead, the resumption of travel across the region and unchanged behavior patterns since the summer, when the risks of spread were lower, have proven to be powerful forces, he said, noting that the concern for US assets is country may be only three or more four weeks behind Europe.
Germany and France, the two largest economies in the eurozone, braced for new restrictions on Wednesday to combat a surge in cases that has spread across Europe. German Chancellor Angela Merkel has warned that the country’s hospital system will be overwhelmed.
In the US, the number of new confirmed cases on Tuesday surpassed 70,000 after hitting an all-time high of more than 80,000 at the end of last week. The seven-day average of new cases peaked in the pandemic on Monday, according to a Wall Street Journal analysis of data compiled by Johns Hopkins University, indicating that the spread of the virus is accelerating.
Vogel said the real conundrum posed by the stock market sell-off is why investors haven’t learned that the lockdowns, while painful and costly, have yet to cause “persistent economic damage” that is impossible to address.
Vogel offered some reasons for what he described as market confusion. These include, he wrote:
1) Investors have proven themselves ineffective in business events like the pandemic, starting off too casually and then shifting to relying on central banks and vaccines, only to lose confidence when predictions of a difficult winter turn out to be correct. 2) The short-term impact of the US elections has been disproportionate to 2021, when it is most likely to occur in 12-18 months. 3) Money managers refuse to wait for developments to unfold in the belief that the only source of value is to advance everything.
Not everyone agrees, however, that investors have struggled to control the pandemic, or that the surge in cases is even the main reason for the stock market crash this week.
“We are, and will remain, reluctant to attribute daily capital markets volatility to virus-related incoming data for one simple reason: investors can read,” wrote Nicholas Colas, co-founder of DataTrek Research, in a note Wednesday. .
Anyone who paid the slightest attention to the news in recent weeks was aware that the situation was getting worse in both the United States and Europe, he said.
Instead, it is more important to look at how the increase in cases translates into consumer behavior and therefore affects business activity. On that front, he noted that Google searches for him have been increasing since a low in mid-September and are up 32% in the past six weeks (see chart below).
Search for “covid”. Google Trends
That’s not great, but it’s more important to note that search volumes are still 38% below the mid-July peak, even as the case count hits new highs, Colas said.
On the other hand, he pointed out that the Cboe VIX volatility index, + 20.69%, a measure of volatility expectations for the S&P 500 over the next 30 days and a de facto indicator of investors’ nervousness, remained at levels higher during the 2008 financial crisis than this year.
“Both the Google trend chart and the VIX 2008/2020 comparison tell the same story, that is, humans (and by extension, markets) have adapted to the realities of this year’s public health challenges ”Said Colas.