By William Davis
So, here we are a few hours past New Year’s Eve, and it’s a good bet our old 2018 market will not soon be forgot. Indeed, despite a good effort to raise a cup o’ cheer on the year’s last trading day, U.S. stocks closed out 2018 with their steepest annual declines since the Financial Crisis, reflecting, allegedly, growing unease among investors about the health of their auld friend the bull.
And surely you’ll buy your pint cup!
As the story goes, the unfriendliness around the trading floors left all the major indexes in the tank for 2018. For the year, the Dow industrials were down 5.6%, the S&P 500 off 6.2% and the NASDAQ down 3.9%. Markets around the world fared no better…the Stoxx Europe 600 shed 13% in 2018, while the U.K.’s FTSE 100 declined 13% and Japan’s Nikkei Stock Average fell 12%. The easy observation is the bruising stretch of selling over the final months of 2018 reflected investors’ growing pessimism toward the global economy and the unwinding of central banks’ easy-money policies. That sentiment, however, was not brought to mind for all.
and surely I’ll buy mine!
Truth is, behind the nasty market slide of 2018 is an underlying new reality: The bulk of trading today is on autopilot — controlled by machines, models, or passive investing formulas, creating an unprecedented trading herd that not only moves in unison, but does so with mind-numbing speed. Between quantitative hedge funds, which now account for more than a quarter of trading in the stock market, and a combination of passive funds, index investors, high-frequency traders, and market makers, around 85% of trading volume these days is in the uncaring hands of trade bots.
And we’ll take a cup o’ kindness yet,
It’s the market’s new structure, they say, and it features less trading by investment banks and more by algorithmic-focused models. In practice, the algorithms, which are essentially any one bartender’s recipe for his or her special investment cocktail, automatically buy and sell based on pre-set inputs. When markets, for whatever reason, turn south they’re programmed to sell. And if prices drop, many are programmed to sell even more. As a recent result, say the few remaining humans around the trading floor, normal year-end nervousness was almost violently amplified in 2018. Selling that in days past would have resulted in measured losses led to fast and deep drops.
for auld lang syne.
While the depth and speed of this market downturn are forcing a re-examination of conditions in the global economy, there are no apparent signs of the kind of imbalances that have fueled previous meltdowns. More obvious is a comparison to the market shakeout in late 2015, which like the current episode, lacked an obvious trigger and was accompanied by anxiety over the Federal Reserve’s plans to raise interest rates. We might suggest that old times not be forgotten
What the numbers are saying…
- $4.4 billion.
Value of Eddie Lampert’s offer to acquire roughly 425 Sears stores
What folks who beat the stock market last year are saying…
“They (luxury investments) will always have some sort of market because somebody loves them. With a share, there is no sense in owning it for the sake of owning it.”
- Andrew Shirley, a partner at global real-estate consulting firm Knight Frank
“People are looking for a place for their cash and the security of holding something physical is appealing. They are looking outside securities and gold is not what it used to be.”
- Anthony Maxwell, director at Liv-ex, the London-based wine exchange
“Wine is something to drink and enjoy, and art is something to appreciate. You might enjoy the updraft of higher prices in beneficial markets but you shouldn’t be surprised if there is a downdraft.”
- Robin Creswell, managing principal at Payden & Rygel, a Los Angeles-based asset manager
“If people make money on the stock market, they have more money to spend on their hobby. They decided to allocate more to classic cars as part of their portfolio because they couldn’t find returns elsewhere, but there are more alternatives as interest rates normalize
- Dietrich Hatlapa, director of Historic Automobile Group International.
What the facts are saying…
- The last time the Dow ended the year in negative territory after being positive through the first three quarters of the year before Monday was 1978. The year was 1948 for the S&P 500 and 1987 for the NASDAQ.
- In December, analysts cut their earnings forecasts for 2019 on more than half the companies in the S&P 500, the first time that had happened in two years.
- On this day in 1915, Wall Street had its slowest trading day of the 20th century as Europe’s armies mired themselves in a bloody standstill. Only 23,505 shares traded hands on the New York Stock Exchange. This was also one of the best times to buy in the entire 20th century: By the end of 1915, the Dow had risen 82%, its largest annual climb ever.
What folks with an ear to the Street are saying…
“The year is ending badly for stocks, which has investors averting their eyes. But there are deals to be had for those who can bear to look.”
- Heard on the Street columnist Charley Grant
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