Navigating Extreme Stock Market Volatility


Forget that the major US stock indices posted a gainer last week. All that most investors will remember is a wild week that took their portfolios on a harrowing roller coaster ride.

These market fluctuations are not 1 month, 1 week, but 1 day moves

The weekend’s news about the further spread of the coronavirus points to the possibility of another volatile week, especially as policy makers scramble to catch up with the economic and social damage being inflicted by the virus.

In contemplating this unsettling outlook, investors should remember the following:

Volatility is a tug of war, here the coronavirus is causing economic disengagements and could drive a series of bad economic data reports, negative corporate earnings revisions and financial distress for some companies.

These economic “sudden stops” involve a phenom that is extremely rare in advanced economies: simultaneous supply and demand dislocations. Bringing about less spending in leisure and travel sectors.

Restarting is not easy because of highly interconnected economies in which an effective restart requires a critical mass of synchronization and coordination.

There are tough managerial decisions that need to be made on a timely basis, with the high risk of others (pols and lawyers) 2nd-guessing the management team

Even when analytical risks are objectively low, fear has a way of amplifying the negative economic and social effects of the uncertainties that comes with a new illness.

With misinformation and exaggerations making things worse, most people will err to risk aversion as they get taken further out of their comfort zone and normal operating routines.

Travel, conferences, sporting events and festivals are cancelled out of precaution, adding another layer of paralysis to economies already suffering income losses and supply chain disruptions.

Having initially underestimated the impact of something happening far away in China, advanced countries are now working hard to counter and defeat the virus.

The immediate emphasis is on micro measures. These will soon be placed in a more holistic “whole of government approach.” They are also likely to be supplemented by better global policy coordination.

It is a shared problem, involving collective responsibilities and needing coordinated approaches to minimize “beggar-thy-neighbor” problems.

The most critical area is medical advances to better understand this new virus, contain its spread, counter its effects, and increase immunity.

Markets will tend to grasp bits of positive news, whether confirmed or not, to counter the stream of negative economic news. 

The reaction will be particularly pronounced if the news is related to vaccine development.

By Mohamed El-Erian

Paul Ebeling, Editor

Have a terrific week.