We’ve witnessed the quickest, most turbulent bear market, followed by an equally speedy recovery. Over the past six months, the S&P 500 index has gone up by 47%. Throughout this time one thing has remained constant — heightened levels of volatility, and an ever-increasing lack of liquidity. There’s some strong evidence that leads us to believe that those two factors are not a product of the post-crisis market structure - on the contrary, it seems that they led to a large part of the recent rally. For the past few months, the S&P volatility index managed to stay above 25, except for a few trading days. When we look back a couple of years, this level is concerningly high.
Why are we seeing these volatility levels?
Some believe that this has been caused by the crazy speculative trades initiated by Robinhood traders who can be found bragging about their losses over at r/wallstreetbets[1].
While that is definitely a part of the equation, we don’t believe that bored college students have the financial capacity to actually move the market, no matter how bold their levered trades are.
A lot of factors suggest that the new high volatility environment stems from a structural change in the markets — the move to passive investing.
The underlying factor — demographics
Different surveys have demonstrated the tendency of younger investors (people aged 18–35) to invest the majority of their capital in index-tracking ETFs. Older investors, on the other hand, are still reluctant to ride on the passive wave and keep their holdings in actively managed funds. With every year passing, however, some of them reach retirement and start liquidating their investments. The redemptions are always a drag on active fund performance, since they force the managers to sell their favourite stocks, and cover shorts at inconvenient times, and that only exacerbates the problem. This feedback loop led to unprecedented outflows out of active managers. The migration from active to passive has only been accelerating in the past five years and it has led to the total dominance of passive investing.
In 2019 alone, actively managed equity funds had outflows of $41 billion, while passive equity funds saw an inflow of $162 billion.
According to a paper[2] released by the Federal Reserve Bank of Boston, passive funds now make up 48% of AUM in equity funds, up from 14% in 2005.
“So what…”, you may think, passive investing leads to a better risk-adjusted return, right? Well yes, but actually no. At least not for too long. To cite the favourite sentence of the SEC:
Past performance is not indicative of future results
Like every other strategy out there, popularity might also cause the demise of passive ETFs. The underlying theory behind passive investing is the efficient market hypothesis. The case can be made that if every market participant is actively trying to take advantage of mispriced equities, prices start reflecting all available information. That can never be achieved to 100%, but it can definitely get close. In order for the theory to hold up, there has to be a competitive active management field, constantly trying to squeeze every decimal of alpha that exists in the market.
If, however, 50% of all investors are passive and do not care about valuation, arbitrage, and all of those “useless methods”, the efficient market hypothesis begins to crack. We’re seeing this exact thing right now, with large-cap US equities, which are priced way above any reasonable model or expectation.
The fact that when fewer market participants are involved in active price discovery, markets tend to behave in strange ways tells only half the story.
The biggest concern caused by the massive influx of capital into passive investments is the constant level of high volatility, and the reduction in liquidity, especially in the stocks with the highest market capitalisations.
While everyone is commenting on how the Fed is flooding the market with liquidity, perhaps that’s just not reaching the equity markets. Considering that we are at the same level on the S&P500 as in February, now the liquidity is nowhere to be found.
We believe that the reason for the unprecedented V-shape recovery that we witnessed in US equities is mainly caused by the lack of liquidity caused by the growing share of passive investors on the market. When thinking about passive ETFs, we realise that they are not actually passive. They are just like active managers, but with crazier rules. For instance, most passive investors just hold onto their shares while the market is down, and sometimes even purchase more. This means that the index-tracking funds are almost always in a position of net capital inflows and they have to keep buying shares. One question quickly arises — if no one is selling, who are they going to buy from? That’s exactly how prices explode. When the available order book for the biggest company — Apple was at $2.5 million, in a day in late August, and considering that on a good day, $1 billion could flow into the iShares SPDR S&P 500 ETF, that means that the asset managers of the ETF are obligated to buy 60 million dollars of Apple in a single day. Well, what happens when there is $2.5 million worth of shares for sale at the current price, and you need to buy $60 million? Easy — you just raise the price to entice more sellers.
This correlation between the discontinuous fashion in which the market operates and the rise of passive investing has also been discovered in a couple of studies[3].
The results show that arbitrage activity between ETFs and the underlying securities leads to an increase in stock volatility. Moreover, consistent with a deterioration of pricing efficiency, ETF ownership and flows appear to make prices diverge from random walks, both intraday and daily. These findings lend support to the conjecture that liquidity shocks in the ETF market are propagated, adding a new layer of non-fundamental volatility.
Long story short, the ever-increasing share of passive investors leads to an increase in market fragility, both to the upside, and the downside.
The solution
In this new market environment, when daily price moves are exacerbated by a lack of liquidity and the huge buy/sell orders from passive asset managers, the only way we see to reduce portfolio risk and drive a positive alpha return is to be long volatility. Unfortunately, long volatility strategies are not as easily applicable to a retail portfolio as in a professional setting, but we need to see at least some tail-hedging applied by retail investors, or the risk of a go-to-zero event is just too high. If we see the share of passive investors increase even more to above 50%, the levels of volatility that we might experience could change our perceptions of risk and break a lot of the existing models in the space. In the post-2020 world, we’ll be sailing in uncharted territory as, evidently, there’s a new market structure, and when it comes to market shocks — we’ve seen nothing yet.
[1] https://www.reddit.com/r/wallstreetbets/ [2] Working Paper | SRA 18–04 | August 27, 2018. Last Revised: May 15, 2020 The Shift from Active to Passive Investing: Risks to Financial Stability? Kenechukwu Anadu, Mathias Kruttli, Patrick McCabe, and Emilio Osambela [3] Working Paper | Do ETFs increase volatility? Itzhak Ben-David, Francesco Franzioni, Rabih Moussawi
It seems an absolute denial of common sense – how can markets thrive in a time of economic mayhem? Conventional wisdom – as I recently read in a US Investment Bank’s equity strategy note - tries to explain the gains in terms of: “Markets anticipate better days ahead. Although the timing is uncertain, the stock market is expressing confidence the pandemic will end with a vaccine and better treatments in the interim.”
Really? Markets are supposed to be rational. A vaccine tomorrow will not undo the damage already done and at best could only accelerate a recovery back to where we were. Corporate earnings may take years to recover. Betting big on the hope of a vaccine sounds like an irrational toss of the dice. And…hope is never a good investment strategy.
To understand why markets are so strong you need to follow the implications and consequences of government, and particularly, Central Bank action. Markets follow the money – and that requires you forget everything you thought you knew about stocks, bonds, prices and future valuations. Concepts such as the ability of a firm to generate future growth, or earnings before tax and interest, or even its likely ability to repay its borrowings, are no longer relevant in today’s markets. Put away that copy of Benjamin Graham’s ‘The Intelligent Investor’, it will not be needed these next 30 years, and dispense with notions like fundamentals or value.
Today there are new themes to consider.
Markets are no longer setting prices. The “invisible hand” of markets efficiently allocates capital based on demand and supply representing the summation of what every market participant believes. It ensured companies were disciplined to perform strongly. Failing companies were punished by stock price falls and wider bond spreads.
But that price-setting function has been replaced by an implicit understanding that Central Banks will do “whatever it takes” to avoid a market meltdown. It no longer matters what investors really think about the economy – if they are certain Central Banks will bail them out, then that dictates their investment behaviour.
What matters most in today’s hyperbolic market are the consequences of Zero Interest Rate Policy (“ZIRP”) and QE Infinity. ZIRP absolutely distorts the assessment of risks vs returns. QE is the process by which Central banks have flooded markets with liquidity since the Pandemic erupted to stave off an immediate recession, corporate insolvencies, and a catastrophic market crash. They have succeeded but at an enormous cost.
It’s been the limitless Central Bank liquidity and the promise they will do, even more, that has caused Financial Assets (Bonds and Equity) to soar. The investors who understand the process are simply following the money – arbitraging the implied Central Bank “put”. They know the economic damage that’s been done, how corporates are closer to bankruptcy than ever, and that global demand and supply remains absolutely stressed. They aren’t investing on the basis of recovery – they are simply investing on the basis that Central Banks have no option but to continue bailing them out.
Markets follow the money – and that requires you forget everything you thought you knew about stocks, bonds, prices and future valuations.
It’s been a wild and improbable ride. At times it felt like markets were out of control. Although there are stories like a hybrid truck-maker being worth more than Ford despite not having delivered a single vehicle, this rally started with less of the “Irrational Exuberance” that has characterised other historical stock market price bubbles. What we have this time is a bubble and price distortion deliberately created by Central Banks.
The smart money knows the Central Bankers have little choice but to sustain it. Not everyone is smart money. Most investors are followers and are all too easily persuaded of the merits of a snake oil that promises enormous returns. Who wants to listen to sage market professionals warning of the dangers of Central Bankers setting market prices when stocks are going ever higher?
Most investors aren’t particularly aware of the Central Banking shenanigans going on under the surface – what they see is a market going up and up. FOMO (the fear of missing out) is one of the most powerful forces in finance. That’s particularly relevant in terms of the funds management industry – where complacent investment managers are far more concerned about career-risk rather than market-risk. Missing a rally like the one we’ve seen since March would be a career-limiting mistake. Career risk explains why most investment managers do a little more than benchmark themselves to indices.
The rally has developed a momentum all of its own - sucking in buyers who fail to see the dangers implicit in herd mentality and the triumph (in many cases) of hope over common sense. The rise of “Robin Hood” retail day-traders unburdened by conventional market wisdom says it all – they genuinely believe the most dangerous four words in the market lexicon: “this time it’s different”.
The rally has developed a momentum all of its own - sucking in buyers who fail to see the dangers implicit in herd mentality and the triumph (in many cases) of hope over common sense.
Long-term… It’s never different.
In the short-term, QE Infinity is working. Cash-strapped corporates have been able to borrow the money they need to see them through lockdown at ultralow interest rates. Widespread insolvency and default has been avoided. Investment banks are all advising their clients to buy corporate debt and finding reasons to promote stocks. That’s their business model - to sell financial assets.
But there will be consequences.
As prices head stratospheric, it’s caused returns to plummet. The result is Financial Asset Stagnation – bonds and stocks cost more but are worth less. That’s triggered a desperate search for meaningful returns in an increasingly repressed market where yields are trending towards zero. Pension funds are dipping into their capital to meet their liabilities. The only way to improve returns is to take more risk – hence normally staid bond investors find themselves sucked into equity markets as “yield tourists” in order to squeeze some returns from their portfolios.
This is going to prove a massive long-term problem. Ultra-low interest rates and unlimited liquidity are boosting markets but make long-term investment planning impossible. The value of a typical pension fund has increased, but the size of pension it can fund has dramatically lessened.
It’s hard to see how Central Banks can now exit their role of handing out free cash to markets. More and more companies are now dependent on cheap debt. Sovereign nations are running up borrowing to pay for it all. At some point, can the money that’s bailing out markets run out? Not necessarily – interest rates are effectively zero, and the money creation by Central Banks costs nothing. (Unless it causes a crisis of confidence in the underlying currency, which cause devaluation and inflation - but if every country is doing the same thing… why would that matter.)
The devil is in the detail. The market is no longer disciplining bad companies or forcing them to invest, plan and develop sensibly. Terminally stupid and financial challenged companies, like Boeing, have been able to borrow billions at record low-interest rates despite manifest corporate failings. If the market doesn’t discipline companies – who does? Hence the rise of the dangerous ESG (Environment, Social and Governance) approach to investment – only buy companies that pass unquantified tests on what is good and bad. It’s a form of financial woke – and makes even less sense. A company that is well managed and led (Governance) will always do better.
And what do companies do with all that money they’ve borrowed? Up until the coronavirus, a significant amount of debt was raised to finance stock buybacks – doing nothing in terms of financing value-added productive assets, but simply pushing up the firm’s stock price and inflating executive bonuses! The first half of 2020 has seen record volumes of new corporate debt issued on the markets, mainly to finance the costs of the virus shutdown. None of the debt is creating new jobs or new factories – it’s increased leverage simply to stay still.
There is no doubt Central Bank action has created an enormous financial asset price bubble. The question is – will it pop? Can Central Banks risk it? It is probably worth reminding readers of my number one market mantra: “The market has but one objective: to inflict the maximum amount of pain on the maximum number of participants”.
You can invest in the stock market directly, meaning when you decide when, how much, and in what way you invest.
For that, you need to have experience in trading on the stock market, the necessary information on market developments, a short-term and long-term strategy, the necessary accounts and trading tools, and most importantly - investment assets.
You can also invest in the stock market through investment funds, which is much more comfortable.
Investing in the Stock Market or Not
This has become a rhetorical question these days. Investing in the stock market is the best way to fertilise your capital and finally make your capital work for you. However, it’s necessary to know how to invest directly in the stock market, and to approach it extremely carefully and only after generous preparations.
If you don’t have the necessary knowledge to be able to invest in the stock market on your own, the best option available to you is through investment funds. Anyone who engages in trading on the stock market and doesn’t have the necessary knowledge is doomed to failure, and even worse - will lose all their invested money.
About 80% of trading on the stock market is done by insufficiently professional traders. That’s why there’s always a great opportunity to make money on the stock market.
Direct Investment in the Stock Market
Direct investment in the stock market means that investors independently hire brokers to whom they give instructions for buying or selling items with which they want to trade on the stock market. They are offered many opportunities: from trading the best shares in the UK, raw materials, derivatives (financial), currencies, cryptocurrencies…
In this sea of offers, investors need to decide what they want to trade with because each of these products requires a different tactic, parameters, trading rules, etc.
In addition to this, it’s necessary to decide the dynamics of trading. This refers to the dynamics with which they want to monitor changes in the stock market. From changes at the level of seconds to changes at the level of days, weeks, or months. The faster the dynamics, the greater the knowledge and self-control required.
Direct Investment Costs
Investing in the stock market isn’t cheap. In addition to the funds you’re willing to invest, it’s necessary to take into account the investment costs, which aren’t small at all. They are different in relation to the amount of planned investment, trading dynamics, conditions under which you start investing…
The most common costs to count on are the cost of opening a trading account, the cost of a broker, the cost of the stock market, the cost of buying, the cost of selling, the cost of taxes, and the cost of withdrawing funds. All of these costs can take away the profits you make through trading, and it’s extremely difficult to make a net profit.
And note: direct investment isn’t recommended for so-called “small“ investors.
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Investing in the Stock Market Through Investment Funds
Investing in the stock market through investment funds is truly the most comfortable way to invest. The investment fund, as a collective investment institution, is designed to help “small“ investors to participate in world markets under the same conditions as “large“ investors. Funds of investment fund members are collected and invested under previously agreed conditions (investment fund prospectus).
The costs are calculated as if invested by one investor and are divided among the members of the investment fund. This reduces investment costs and most of the funds are invested.
Advantages of Investing Through Investment Funds
Investing in stock markets through investment funds has many advantages over direct investing. Let’s list some of them:
- Reducing investment costs
- Provided professional investment management by portfolio managers
- Monitoring market movements by consulting firms
- The possibility of investing in several types of products
- Portfolio diversification by industries, currencies, and geographical diversification
- The ability to choose the risks you want to accept
- Constant control of your investment
- Maximum liquidity of funds
- Cost-benefit transparency
Reducing Investment Risk
The risk of investing in the stock market is always present. We can’t avoid it but we can define and diminish it.
- Defining risk means determining exactly how much risk you’re willing to accept, and therefore how much profit you expect from your investment.
- Risk reduction is achieved by diversifying investments, while the risk is higher if you’ve invested in a smaller number of products.
If you want low risk, you’ll invest in a money market fund, which invests only in bills, bonds, bank deposits, and the like. If you’re willing to accept a higher risk, you’ll look for a balanced fund, which invests part of the money in bonds and part in shares.
For investors who accept even greater risk, the chosen fund is an equity fund. For investors who want a high level of risk, the right choice are hedge funds, Forex, and cryptocurrencies.
Nigel Green, Founder and CEO of deVere Group, has warned that coronavirus, paired with the heightening geopolitical and trade tensions, could drive the world to the brink of a global recession this year. He said: “Investors have largely been caught off-guard by the serious and far-reaching economic consequence of the coronavirus. This, despite major multinational organisations already lowering their profit guidances, and many more likely to do so in coming weeks. Clearly, this will hit global supply chains, economies across the world and ultimately government coffers too.
“However, it does seem that the world is waking up to the reality of the situation as the containment of coronavirus hasn’t yet materialised and confirmed cases soar in different countries. Until such time as governments pump liquidity into the markets and coronavirus cases peak, markets will be jittery triggering sell-offs”, Mr Green notes.
Investors around the world must take action if they want to safeguard their wealth in the current volatile environment and they must take precaution about the stocks they want to put their money in as the coronavirus outbreak is disrupting the supply chains of many companies.
Here is Finance Monthly’s list of the top 5 stocks that are likely to weather the storm, which will hopefully help you with handling your portfolio in light of the coronavirus news.
McDonald’s
You can find McDonald’s signature golden arches in over 100 countries across five continents. It is one of the biggest and most recognisable fast-food chains in the world. Thanks to its unique franchising structure and low prices, McDonald’s is one of these companies that will thrive in any economic condition.
With over four decades of consecutive annual dividend increases, McDonald's is a Dividend Aristocrat[1] - it has issued dividends every year since 1976. In the last few years, it has repurchased the shares at a meaningful rate which has boosted the earnings per share and has supported the stock price.
Although the fast-food chain had to temporarily shut over 300 restaurants in China in January (which is only about 1% of its China stores), due to fears about the coronavirus outbreak, China accounts for only 2% of McDonald’s earnings. McDonald’s stock has doubled since 2015 and has shown no signs of slowing down, even with the coronavirus out there.
Facebook is one of the best and most safe stocks to buy on coronavirus fears. Although shares have taken a hit, investors should remain focused on the long term, valuing stocks based on fundamentals.
Facebook is one of the few companies that have no exposure in China, where the outbreak is the worst, as the social media platform is blocked there. On top of this, there are no signs that minimal outbreak in other countries has resulted in weaker digital ad spending, however, investors should keep an eye out for any commentary from Facebook’s management on whether or not the virus is having a material impact on the social network.
When taking the current low-interest-rate environment, it is also worth noting that Facebook is a growth stock, and growth stocks tend to perform very well in low-interest-rate environments.
The stock was also cheap before the coronavirus selloff, so all in all, FB stock could provide investors with a high-quality, big-growth company with minimal coronavirus exposure.
According to Jeremy Bowman:[2] “Facebook is also highly profitable and sitting on $54 billion in cash and equivalents, giving the company plenty of resilience against an extended disruption. The stock is trading at a P/E ratio of 21 based on adjusted earnings and backing out its cash sum. Considering its growth rate, the stock already looks like a bargain. If shares keep falling, it will be a downright steal.”
Even people who haven’t been affected by the coronavirus are becoming more and more health-conscious, trying to take precautionary measures through buying products like hand-wash, wipes, sanitisers, disinfectants, etc.
Johnson & Johnson
Currently in its tenth year of economic expansion, Johnson & Johnson’s stock has a reputation as a safe haven. Despite a slight dip in the stock however, it seems like its future will be bright.
Professor Kass from the University of Maryland[3] is bullish on healthcare stocks due to the amount of money that people are expected to spend on healthcare in the upcoming months, thanks to the coronavirus outbreak.
Kass commented: “… several stocks that are currently under the radar for this possible epidemic should do very well as healthcare spending in the years ahead is likely to increase substantially”.
The rationale behind this is super straightforward – Johnson & Johnson sells a wide range of everyday healthcare products to millions of people across the globe. Even people who haven’t been affected by the coronavirus are becoming more and more health-conscious, trying to take precautionary measures through buying products like hand-wash, wipes, sanitisers, disinfectants, etc. At the time of writing this, pharmacies and drug stores in the UK have run out of hand sanitisers due to popular demand. Johnson & Johnson is therefore expected to “continue experiencing rapid growth in revenues and earnings in the foreseeable future,” says Professor Kass.
Thus if anything, the virus’ outbreak could create a long-term positive effect on the Johnson & Johnson stock.
Apple
Thanks to the coronavirus outbreak, global technology giant Apple has been hit hard from multiple angles, with having to temporarily close all corporate offices, stores and contact centres in Mainland China, and suppliers being ordered to reduce or halt production. This was all followed by a 5% drop in Apple’s stock on 31st January, however, Apple will be perfectly fine and remains a stock worth investing in. Yahoo Finance believes that[4] the App Store will get a big boost during the outbreak due to the hundreds of millions of Chinese consumers being stuck at home right now, who will be looking for ways to entertain themselves. Additionally, February doesn’t tend to be a big month for iPhone sales as it is. The company relies heavily on its new iPhone launch in September and by then, coronavirus will be in the past (hopefully).
Apple’s stock remains loved by most investors and will undoubtedly weather the coronavirus storm. Once that’s over, with the release of its 5G iPhone, the tech giant is expected to see huge growth in the last few months of the year.
More and more people choose to not leave their houses amid coronavirus fears across the globe, which means that technology companies that serve consumers at home, such as Netflix, could come out as a winner from the coronavirus outbreak.
Netflix
Despite the tumble in the broader market averages, Netflix stock, along with other home entertainment stocks have been less affected. Netflix stock has made somewhat of a comeback after a solid run in 2018 – it has seen an increase in stock value of some 40% since September. On the stock market [5] on Thursday 27th February, the video streaming provider fell 2% to 371.71 after spending most of the session in positive territory.
Raymond James analyst Justin Patterson commented[6]: "We believe Netflix is in a unique position to benefit from 1) a solid content lineup; 2) normalisation of competitive landscape; 3) increased consumer time spent indoors". It makes perfect senses - more and more people choose to not leave their houses amid coronavirus fears across the globe, which means that technology companies that serve consumers at home, such as Netflix, could come out as a winner from the coronavirus outbreak.
Netflix stock ranks number 15 on the IBD 50 list[7] of top-performing growth stocks.
[1] https://www.fool.com/investing/2019/11/19/why-its-time-to-buy-mcdonalds-stock.aspx
[2] https://www.fool.com/investing/2020/02/25/3-stocks-im-buying-if-the-coronavirus-selloff-gets.aspx
[3] https://finance.yahoo.com/news/7-u-stocks-buy-coronavirus-195612724.html
[4] https://finance.yahoo.com/news/7-u-stocks-buy-coronavirus-195612724.html
[5] https://www.investors.com/market-trend/stock-market-today/stock-market-today-market-trends-best-stocks-buy-watch/
[6] https://www.investors.com/news/technology/click/netflix-stock-home-entertainment-stocks-safe-coronavirus/
[7] https://research.investors.com/stock-lists/ibd-50/
There have been a number of high profile stock market crashes over the years often resulting in huge losses for both individual investors and businesses. Although there is no specific number that determines when a stock market crashes, a crash occurs when there is a significant decline in the share prices. Usually it becomes a crash when one of the major stock market indexes loses over 10% of its value. Most of the major stock market crashes are preceded by a long bull market and they often result in panic-selling by investors attempted to liquidate their stocks to avoid further losses.
The stock market fluctuates daily, but on some occasions the crashes can be seismic and cause long lasting effects. Here we take a look at 10 of the biggest stock market crashes in history.
1. The 1673 Tulip Craze
In 1593 tulips were first brought to The Netherlands from Turkey and quickly became widely sought after. After some time, tulips contracted a non-fatal tulip-specific mosaic virus, known as the ‘Tulip breaking virus’, which started giving the petals multicolour effects of flame-like streaks. The colour patterns came in a wide variety, which made the already popular flower even more exotic and unique. Tulips, which were already selling at a premium, grew more and more in popularity and attracted more and more bulb buyers. Prices, especially for bulbs with the virus, rose steadily and soon Dutch people began trading their land, life savings and any other assets they could liquidate to get their hands on more tulip bulbs. The craze got to a stage where the originally overpriced tulips saw a 20 fold increase in value in one month.
The 1673 Tulip Mania is now known as the first recorded economic bubble. And as it goes in many speculative bubbles, some people decided to sell and crystallise their profits which resulted in a domino effect of lower and lower prices. Everyone was trying to sell their bulbs, but no one was interested in buying them anymore. The prices were progressively plummeting and everyone was selling despite the losses. The Dutch Government tried to step in and offered to honour contracts at 10% of the face value, which only resulted in the market diving even lower. No one emerged undamaged from the crash and even the people who got out early were impacted by the depression that followed the Tulip Craze.
Tulip Mania; Image credits: Krause & Johansen
2. The South Sea Bubble 1711
Another speculation-fuelled fever occurred in Europe a few decades after the Tulip Mania – this time in the British Empire. The bubble centred around the fortunes of the South Sea Company, whose purpose was to supply 4,800 slaves per year for 30 years to the Spanish plantations in Central and Southern America. Britain had secured the rights to provide Spanish America with slaves at the Treaty of Utrecht in 1713 and the South Sea Company paid the British Government £9,500,000 for the contract, assuming that it could open the door to trading with South America and that the profits from slave trading would be huge.
This was met with excitement from investors and resulted in an impressive boom in South Sea stock – the company’s shares rose from 128 1/2 in January 1720 to over 1,000 in August. However, by September the market had crumbled and by December shares were down to 124. And the reason behind the bubble burst? Speculators paid inflated prices for the stock, which eventually led to South Sea’s dramatic collapse. The economy was damaged and a large number of investors were completely ruined, but a complete crash was avoided due to the British Empire’s prominent economic position and the government’s successful attempts to stabilise the financial industry.
Commentary on the financial disaster of the "South Sea Bubble"
3. The Stock Exchange Crash of 1873
The Vienna Stock Exchange Crash of May 1873, triggered by uncontrolled speculation, caused a massive fall in the value of shares and panic selling.
The National Bank was not able to step in and provide support because it didn’t have enough reserves available. The crash put an end to economic growth in the Monarchy, affected the wealth of bankers and some members of the imperial court and confidants of the Emperor, as well as the imperial family itself. It also led to a drop in the number of the Vienna World Exhibition visitors – a large world exposition that was held between May and October 1873 in the Austria-Hungarian capital.
Later on, the crash gradually affected the whole of Europe.
Black Friday on 9th May 1873 at the Vienna Stock Exchange
4. The Wall Street Crash of 1929
On 29th October 1929, now known as Black Tuesday, share prices on the New York Stock Exchange collapsed - an event that was not the sole cause of the Great Depression in the 1930s, but something that definitely contributed to it, accelerating the global economic collapse that followed after the historic day.
During the 1920s, The US stock market saw rapid expansion, which reached its peak in August 1929 after a lot of speculation. By that time, production had declined and unemployment had risen, which had left stocks in great excess of their real value. On top of this, wages were low, agriculture was struggling and there was proliferation of debt, as well as an excess of large bank loans that couldn’t be liquidated.
In September and early October, stock prices began to slowly drop. On 21st October panic selling began and culminated on 24th, 28th and the fatal 29th October, when stock prices fully collapsed and a record of 16,410,030 shares were traded on NYSE in one day. Financial giants such as William C. Durant and members of the Rockefeller family attempted to stabilise the market by buying large quantities of stocks to demonstrate their confidence in the market, but this didn’t stop the rapid decrease in prices. Because the stock tickers couldn’t handle the mammoth volume of trading, they didn’t stop running until about 7:45 pm. During the day, the market had lost $14 billion. The crash remains to this day the biggest and most significant crash in financial market history, signalling the start of the 12-year Great Depression that affected the Western world.
17th July 2014 Washington DC, USA - A detail from one of the statue groups at the Franklin Delano Roosevelt Memorial that portrays the depth of the Great Depression
5. Black Monday 1987
On 19th October 1987, stock markets around the world suffered one of their worst days in history, known today as Black Monday. Following a long-running rally, the crash began in Asia, intensified in London and culminated with the Dow Jones Industrial Average down a 22.6% for the day – the worst day in the Dow’ history, in percentage terms. Black Monday is remembered as the first crash of the modern financial system because it was exacerbated by new-fangled computerised trading.
The theories behind the reasons for the crash vary from a slowdown in the US economy, a drop in oil prices and escalating tensions between the US and Iran.
By the end of the month, stock markets had dropped in Hong Kong (45.5%), Australia (41.8%), Spain (31%), the United Kingdom (26.45%), the United States (22.68%) and Canada (22.5%). Unlike the 1929 market crash however, Black Monday didn’t result in an economic recession.
Following a long-running rally, the crash began in Asia, intensified in London and culminated with the Dow Jones Industrial Average down a 22.6% for the day – the worst day in the Dow’ history, in percentage terms.
6. The 1998 Asian Crash
The Asian crisis of 1998 hit a number of emerging economies in Asia, but also countries such as Russia and Brazil, having an overall impact on the global economy. The Asian crisis began in Thailand in 1997 when foreign investors lost confidence and were concerned that the country’s debt was increasing too rapidly.
The crisis in Thailand gradually spread to other countries in Asia, with Indonesia, South Korea, Hong Kong, Laos, Malaysia and the Philippines being affected the most. The loss of confidence affected those countries’ currencies – in the first six months, the Indonesian rupiah’s value was down by 80%, the Thai baht – by over 50%, the South Korean won – by nearly 50% and the Malaysian ringgit – by 45%. In the 12 months of the crisis, the economies that were most affected saw a drop in capital inflows of more than $100 billion.
7. The Dotcom Bubble Burst
In the second half of the 1990s, the commercialisation of the Internet excited and inspired many business ideas and hopes for the future of online commerce. More and more internet-based companies (‘dotcoms’) were launched and investors assumed that every company that operates online is going to one day become very profitable. Which unfortunately wasn’t the case – even businesses that were successful were extremely overvalued. As long as a company had the ‘.com’ suffix after its name, venture capitalists would recklessly invest in it, fully failing to consider traditional fundamentals. The bubble that formed was fuelled by overconfidence in the market, speculation, cheap money and easy capital.
On 10th March 2000, the NASDAQ index peaked at 5,048.62. Despite the market’s peak however, a few big high-tech companies, such as Dell and Cisco, placed huge sell orders on their stocks, which triggered panic selling among investors. The stock market lost 10% of its value, investment capital began to melt away, and many dotcom companies went out of business in the next few weeks. Within a few months, even internet companies that had reached market capitalisation in the hundreds of millions of dollars became worthless. By 2002, the Dotcom crash cost investors a whopping $5 trillion.
As long as a company had the ‘.com’ suffix after its name, venture capitalists would recklessly invest in it, fully failing to consider traditional fundamentals.
8. The 2008 Financial Crisis
This market crash needs no introduction - we all must remember how ten years ago Wall Street banks’ high-risk trading practices nearly resulted in a collapse of the US economy. Considered to be the worst economic disaster since the Great Depression, the 2008 global financial crisis was fed by deregulation in the financial industry which allowed banks to engage in hedge fund trading with derivatives. To support the profitable sale of these derivatives, banks then demanded more mortgages and created interest-only loans that subprime borrowers were able to afford. As the interest rates on these new mortgages reset, the Federal Reserve upped the fed funds rates. Supply outplaced demand and housing prices began to decrease, which made things difficult for homeowners who couldn’t meet their mortgage loan obligations, but also couldn’t sell their house. The derivatives plummeted in value and banks stopped lending to each other.
Lehman Brothers filed for bankruptcy on 15th September 2008. Merrill Lynch, AIG, HBOS, Royal Bank of Scotland, Bradford & Bingley, Fortis, Hypo Real Estate, and Alliance & Leicester which were all expected to follow however were saved by bailouts paid by national governments. Despite this, stock markets across the globe were falling.
And we all remember what followed… The bursting of the US housing bubble and Lehman Brothers’ collapse nearly crushed the world’s financial system and resulted in a damaged house market, business failures and a wounded global economy.
Don’t miss our articles on the impact of the Lehman Brothers’ collapse:
https://www.finance-monthly.com/2018/09/lehman-brothers-lessons-have-we-learned-anything/
9. The Flash Crash 2010
On 6th May 2010, the US stock market underwent a crash that lasted approximately 36 minutes, but managed to wipe billions of dollars off the share prices of big US companies. The decrease occurred at a speed never seen before, but ended up having a very minimal impact on the American economy.
With the opening of the market on 6th May 2010, there were general market concerns related to the Greek debt crisis and the UK general election. This led to the beginning of the flash crash at 2:30pm - Dow Jones had declined by more than 300 points, while the S&P 500 and NASDAQ composite were affected too. In the next five minutes, Dow Jones had dropped a further 600 points, reaching a loss of nearly 1000 points for the day. By 3:07pm things were looking better and the market had regained much of the decrease and only closed at 3% lower than it opened. The potential reasons behind the crash vary from ‘fat-fingered’ trading (a keyboard error in technical trading) to an illegal cyberattack. However, a joint report by the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) stated that the extreme price movement could have been caused by the combination of prevailing market conditions and the large automated sell order.
As some securities lost 99% of their value in a few minutes, this was one of the most impressive stock market crashes in modern history.
10. 2015–16 Chinese Market Crash
After a few years of being viewed in an increasingly favourable light, China’s Stock Market burst on 12th June 2015 and fell again on 27th July and 24th August 2015. Despite the Chinese Government attempt to stabilise the market, additional drops occurred on 4th and 7th January and 14th June 2016. Chaotic panic selling in July 2015 wiped more than $3 trillion off the value of mainland shares in just three weeks, as fear of complete market seizure and systemic financial risks grew across the country.
Surprise devaluation of the Chinese yuan on 11th August and a weakening outlook for Chinese growth are believed to have been the causes for the crash that also put pressure on other emerging economies.
Sources: https://www.investopedia.com/features/crashes/crashes2.asp https://www.britannica.com/event/South-Sea-Bubble http://www.habsburger.net/en/chapter/crisis-highest-circles-economic-boom-and-stock-exchange-crash https://www.citeco.fr/10000-years-history-economics/industrial-revolutions/crash-of-the-vienna-stock-exchange-in-austria https://www.history.com/topics/great-depression/1929-stock-market-crash https://www.thirteen.org/wnet/newyork/ https://www.britannica.com/event/Asian-financial-crisis https://qz.com/1106440/black-monday-1987-the-stock-market-crash-that-was-so-bad-hospital-admissions-spiked/ https://www.investopedia.com/terms/d/dotcom-bubble.asp https://www.thebalance.com/what-caused-2008-global-financial-crisis-3306176 https://www.thestreet.com/markets/history-of-stock-market-crashes-14702941 https://www.sec.gov/news/studies/2010/marketevents-report.pdf https://www.economist.com/news/2015/08/24/the-causes-and-consequences-of-chinas-market-crash
World stock markets have had a positive start to 2018, signalling a strong year for economic growth ahead.
Forefront in the optimism is Japan, whose stocks increased by over 3%—bringing it to nearly its highest in 26 years. Leading the rally were energy and financials stocks.
This comes after US stock markets closed last night with another record high.
What this means for Japan
Topix index of all First Section issues on the Tokyo Stock Exchange jumped to its highest since 1991, rising by 2.1%. The Nikkei, short for Japan's Nikkei 225 Stock Average and the leading and most-respected index of Japanese stocks, rose by 2.6%.
The Nikkei stock average surged above 20,000—something it has done before, but has not been able to sustain in the past.
The anticipated market rally in 2018 will commemorate the longest winning streak since 1989, when during the Japanese asset price bubble, the Nikkei gained for the 12th straight year.
"With a global economic expansion, Japanese companies will likely keep double-digit growth," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co.
Analysts have said that the expected yen’s weakness, combined with the upbeat economic outlook, means Japanese companies will be aided in posting another record profit in the new year.
Despite the good news, analysts have also warned of a risk of volatility, with Senior technical analyst at Mizuho Securities Co., Yutaka Miura saying: "Although the weather is fine, the waves are high... there will be scattered rain."
Describing the surge, Miura also said: "More overseas market players flocked to the market in the afternoon amid hopes for higher (Tokyo) stock prices this year."
How the US plays a part
Analysts have also forecasted the dollar to trade between ¥95 and ¥120 in 2018, compared with around ¥113 in late December.
Japanese companies such as Toyota and Sony depend heavily on the US market. Construction machinery manufacturer Komatsu, for example, will receive a boost thanks to the US tax overhaul legislation enacted in late 2017.
A potential defeat of Trump's Republicans in the US midterm election in November will likely start to gradually be factored in by investors, with the Nikkei possibly dropping below the 20,000 line.
Mizuho’s Miura concludes: "Following the passage of the tax reform bill, political conflicts between Republicans and Democrats will become clearer toward the midterm elections,” adding: “The conflicts may hamper Trump's efforts to push through other policies such as his long-promised plan to boost investment in infrastructure which is scheduled to be announced in January.”
While Apple reportedly struggles to get the iPhone X off its feet and into the market, stumbling on obstacles it knew would come about, such as developing proper facial recognition and delivering on its aggressive production schedule, global stock markets are fluctuating on the back of several factors, from the disastrous hurricanes to bad European weather and Brexit talk. Black Friday, Cyber Monday and Christmas are still ahead of us however.
Here Lee Wild, Head of Equity Strategy at Interactive Investor, provides an overview of the current global stock economy, as US markets and Japan’s Nikkei put London into perspective:
“The mood on many global stock markets might well be described as exuberant, but not irrational. Yes, it took less than six weeks for the Dow Jones to add the last 1,000 points to top 23,000, but latest US company quarterly earnings are beating expectations - look at IBM's fightback overnight - and president Trump's tax plans could still deliver a boost to the bottom line.
“Japan's Nikkei has just hit a two-decade high, but exports there have risen for a tenth straight month amid demand for Japanese technology.
“That puts what's happening in London into perspective. Investors are right to be concerned about a recent spate of high-profile profit warnings, and Brexit presents its own set of special circumstances, but many companies are delivering strong results and valuations are not excessive.
“Of course, the market will correct at some point. Chatter has picked up in recent weeks following profit warnings from blue-chips GKN, Mondi, ConvaTec and Merlin, but this bunch are not a fair indicator of the market as a whole.
“Unilever's highly-rated shares have come off the boil as bad weather affected sales of its Magnum and Ben & Jerry's ice creams in Europe during the third-quarter, while hurricanes in Florida and Texas held back the Americas. However, underlying sales in emerging markets still grew 6.3% and volumes were up. With just a few months of the financial year left, annual group underlying sales are still expected to grow 3-5% and profit margins improve.
“Don't be surprised to see a pullback between now and Christmas in some markets which have raced ahead this year, but it's unlikely to be the crash everyone is predicting. While inflation is currently outstripping wages growth, the UK unemployment rate is at its lowest since 1975 and any small rise in interest rates will not pull the rug from under this market.”
Today marks the 30th anniversary of the day when the financial bubble, that resulted in the Dow Jones reaching a record peak of 2722 in August, burst in spectacular fashion.
Following a fraught Friday on the New York Stock Exchange where the DJIA dropped sharply, the opening bell on 19th October started a selling onslaught and panic on the floor that hasn't been seen since. We take a look back at Black Monday 1987 in numbers.
Black Monday In Numbers
"It was a frightening week, more frightening than any week in '08" - Jim Chanos
19th October 1987 – The date of Black Monday.
9am – The sounding of the opening bell that began the selling that almost crashed the entire American financial system.
250 points – Points drop on the Dow Jones by 12:30pm.
508.32 points – Number the DJIA fell on 19th October 1987, it was at the time the largest drop Wall Street had seen.
4x – The amount the points drop on 19th October was bigger than the previous record.
22.76% - One Day Percentage Loss on the Dow Jones Industrial Average (DJIA). A record that still stands today.
Dow Jones Industrial Average from January - December 1987
$500 Billion – Amount of capital lost on 19th October 1987.
33% - Drop in S&P Futures on Black Monday.
604.33 million shares – Volume of shares on the New York Stock Exchange. A record at the time.
$1 Billion dollars – Value of Sell Orders reached by 10am on 19th October.
112 million – Shares lost by the Designated Order Turnaround System at NYSE as the computers buckled under the weight of sell orders.
648 - Days it took for the markets to recover.
$18.8 Billion - Market Value Lost By IBM on Black Monday. It was valued at around $62 Billion before Monday 19th October.
"Wall Street was uniformly unprepared for this magnitude of drop" - Paul Tudor Jones, October 19th 1987
23pc - Drop on the FTSE 100 on Black Monday and Tuesday combined. The biggest ever in history and a figure that has never been seen since.
60% - Percentage drop of the New Zealand Stock Market after Black Monday.
$6.7 Billion - Total in paper losses on AT&T Shares.
30.9% - Amount of American Express shares were reduced by during the trading day.
Traders react after one of the worst days the New York Stock Exchange has ever seen.
33 – Age of Paul Tudor Jones in 1987, when he and his colleague Peter Borish foresaw Black Monday.
$100 Million - Amount Paul Tudor Jones made by shorting the market and ensured his legacy on Wall Street.
$1 Billion – Amount Sam Walton, reportedly America’s Wealthiest Man lost on the day. ''It was paper when we started, and it's paper afterward.'' He said after the days trading.
$500 Million - Reported figure that Walton's Wal-Mart company value lost on Black Monday.
40% - Reduction in restaurant bookings and turnover in local businesses used by Wall Street Traders on 19th October.
$500 Million -Reported value of holdings in Allegis, Holiday, Bally and various other companies sold by future President Donald Trump in August that ensured he avoided any losses and became one of the few to make money on Black Monday.
16 hours – The time it took after the Dow Jones Closed on Black Monday for the US Federal Reserve to release a statement saying that it “affirmed today its readiness to serve as a source of liquidity to support the economic and financial system”
10 – Number of the largest banks who extended credit to traders following the Federal Reserve statement.
Traders stand bewildered after the New York Stock Exchange closed on Black Monday
2,078 – Stocks Traded on the board at the NYSE on Black Monday.
2,038 - Stocks Traded on the board at the NYSE that made a loss.
$470 – Amount Gold price per ounce increased (from $15.50) as one of the only performing stocks.
$1 Trillion – Total loss of wealth by the close of play.
$10,000 – Cash withdrawn late on 19th October from his Bank by Allan Rogers, head of government bond trading at Banker’s Trust, and hid in his loft because he was so scared the whole banking system was going down.
7% - Percentage of stocks that didn’t even open the following morning.
126 points – Rise in DJIA in the opening minutes of Tuesday 20th trading following Federal Reserve stop-gap measures.
10:00am – The rally is over and the Dow Begins to plummet once more.
11:28am – Time the Chicago Mercantile Exchange ceases trading on the S&P contract.
The crash was splashed all over the world news following a devastating day for traders.
11:15am – Time on Tuesday 20th October traders and banks like Merrill Lynch, Goldman Sachs and Salomon requested John Phelan CEO of the NYSE perform a total shutdown due to lack of buyers.
285 – Price paid by Blair Hull on MMI Futures in Chicago sparking the rally that some say prevented a full blown crash.
62% - Amount made by Tudor Investment Corp. in October.
102.27 – Dow Jones Industrial Average gain on the day for Tuesday 20th October.
23000 - Number hit by the Dow Jones on October 18th 2017, almost 30 years on from Black Monday sparking fears another equity bubble may be about to burst.
Thanks to some quick responses from the Federal Reserve and a surprise market rally, the Dow Jones rallied enough to avoid a repeat of the Great Depression that had followed the Wall Street Crash of 1929 that bore many similarities to Black Monday in 1987.
The flash crash also led to several huge changes on Wall Street including a kill-switch on trading the S&P if it drops below 7% and an overhaul of the computer systems that had caused so many issues on that fateful day to ensure that the confusion and inability to trade would no longer be an issue. And while there have been monumental crashes on trading floors across the world, none seemed to repeat the speed and fear that occurred on the New York Stock Exchange on the 19th October 1987.
Rumour and conjecture abound in the financial world that lessons may in fact not have been learned, and that we may be in line for another Black Monday, especially given the DJIA topping the 23000 figure just today. Analysts remain nervous, citing an 8-year bull market and reports of a hugely over-inflated US stock market. One thing is for certain, no one at the New York Stock Exchange will want to see the markets offer up any sort of anniversary.
All Photos: Roger Hsu
Sources: Bloomberg, NY Times, Guardian, Reuters, Washington Post
The Dow Jones index broke through the 20,000 mark for the first time yesterday, as markets continue to respond to the potentially stimulative economic policies of the new US President. The Dow Jones now stands at over three times the low it reached in March 2009, when it traded at a touch over 6,600 points.
The Shiller CAPE ratio, one of the most widely-used measures of valuation for the US stock market, currently stands at 28.46, its highest level for 15 years. However it’s worth noting that it has been as low as 4.78 (December 1920), and as high as 44.20 (December 1999).
Meanwhile bonds yields have been on the rise recently, as investors brace themselves for further US interest rate hikes and the potential for fiscal stimulus and increasing trade tariffs to fuel inflation. The US 10 year Treasury is now yielding 2.5%, compared to 1.6% six months ago. The UK 10 year gilt has gone from yielding 0.8% six months ago to 1.5% today.
Laith Khalaf, Senior Analyst, Hargreaves Lansdown commented:
‘The Trump jump has propelled the Dow Jones to an unprecedented level, as investors pile into US stocks in anticipation of lower corporate taxes and more government spending. Meanwhile expectations of further interest rate rises in the US, and the potential for inflationary fiscal stimulus, has been putting upward pressure on bond yields in the last few months.
Stock indices in the US and UK may well be at or near record highs, however when the earnings generated by companies in these markets are factored in, stock valuations show neither the extreme pessimism of 2008, nor the irrational exuberance of 1999. This means they are trading somewhere in the middle of their range, so are neither exceptionally cheap or hideously expensive. In the short term the stock market could move in either direction, but for long term investors it still makes sense to keep a healthy slug of their portfolio in equities.
Meanwhile bonds have come under pressure of late, as it looks like the US central bank is in the mood to raise interest rates this year. However there have been many false dusks for the bond market, which has defied expectations since ultra-loose monetary policy was initiated all those years ago in response to the financial crisis. Central banks in the UK, Europe and Japan are still engaged in stimulative activity, and while the US Fed is starting to push in the opposite direction, it’s likely to err on the side of caution lest by raising rates too soon it damages the US economy, and propels an already strong dollar even further upwards. While the best days for the bond market may be behind us, there‘s no sign that interest rates are going to return to pre-crisis levels any time soon, which acts as an anchor on rising yields.’
(Source: Hargreaves Lansdown)
The FTSE 100 yesterday rose for an eleventh consecutive trading day, making this the joint longest winning streak the index has ever produced.
The index has risen for 11 trading days in a row on three other occasions, so if the rally continues today, it will be the longest winning run since the index started 33 years ago.
Laith Khalaf, Senior Analyst, Hargreaves Lansdown commented:
‘The stock market moves down as well as up, but you wouldn’t have guessed that if you’d been keeping your eye on the Footsie for the last few weeks.
The market rally has been driven by a falling pound and rising metals metal prices, and in its eleventh day received a boost from an unexpected source in the form of the supermarkets, after Morrison issued a positive Christmas trading statement.
While the FTSE 100 stands at a record level, valuations on the UK stock market are not at abnormally high levels once you factor in the earnings produced by UK companies. What’s more the headline index doesn’t account for dividends, which are a key element of returns from the UK stock market, and are particularly attractive when interest rates are so low.
As ever the short term could bring feast or famine, but either way investors should keep focussed on the long term, which is where the stock market really comes into its own.’
(Source: Hargreaves Lansdown)
Yesterday was a positive day for the stock market, with the FTSE 100 now trading close to a one year high, led by domestically-focussed stocks, and following on from second quarter UK GDP growth coming in ahead of expectations at 0.6%. Even the FTSE 250 is back in the game, and is now trading close to its pre-Brexit level.
Longer term total returns from the UK stock market are also looking pretty good right now, though clearly there has been some choppiness along the way, and no doubt there will be more to come.
| Total return/ % | |||
| 1 year | 3 years | 5 years | |
| FTSE 100 | 6.3 | 14 | 36.5 |
| FTSE 250 | 0.2 | 25.5 | 66.1 |
| FTSE Small Cap | 2.8 | 26.1 | 63.0 |
| FTSE All-Share | 5.2 | 16.4 | 41.0 |
Source: Lipper to 26th July 2016
Laith Khalaf, Senior Analyst at Hargreaves Lansdown commented:
‘Today (27/07) there’s been positive news for stocks at both a micro and macro level. Domestically-focussed stocks started the day on the front foot, with Taylor Wimpey, Rightmove and ITV all posting robust results, and GlaxoSmithKline announcing £275 million of investment in the UK. The strong UK GDP figures added to the confident mood, as stock prices shrugged off the Brexit blues.
However, all today’s figures look back to a period predominantly before the referendum, and as such they give us little indication of what the vote actually means for the economy, or the companies exposed to it. They do at least tell us the economy has some momentum going into the implementation of Brexit, and may yet give the Bank of England pause for thought when they decide whether to cut interest rates next week.
Indeed much of today’s rise in GDP was down to the manufacturing sector, which recorded its strongest growth in six years. Ironically, the makers appear to be marching now George Osborne has left Number 11. Business and financial services grew, but at a slower rate than in the first quarter, whereas construction output went backwards. We can see uneasiness over these sectors reflected in the stock market, with UK banks and house builders still licking their wounds from the heavy share price falls sustained since the Brexit vote.
The UK’s mid cap index has staged an impressive recovery since the referendum, but there have still been casualties of the decision to leave the EU, with around a fifth of the names in the index showing double digit price declines since the result was announced.’
(Source: Hargreaves Lansdown)
