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Is this part of why stocks have slipped so much? Based on what I know of the market (what relatively little I know, I keep up with it, but it's not my day job),

Is this part of why stocks have slipped so much? Based on what I know of the market (what relatively little I know, I keep up with it, but it's not my day job), I'd have expected most of the volatility from coronavirus to be in the sectors most heavily affected by low foot-traffic. Instead companies like Google and Apple are down 30%. I doubt the anyone is seriously expecting COVID-19 to cause the average of Google's or Apple's profits over the next 20 years to fall by 30%, so it seems the market must have been oversubscribed? Maybe it still is. The S&P500 is still at a historically relatively high PE of 18.5 and a Schiller CAPE of 23.2, both of which will probably be even higher after earnings are announced next month.

deleted 7y ago
[deleted]
AznHisoka 7y ago
A lot of trading is done via indexes. So if people are bearish, the whole market ends up tanking. Stocks like Roku and Netflix should actually benefit from people staying home, but their stock is still going down, because people are just selling the entire index.
- short_sells_poo 7y ago
  You are correct and this effect is increasing over time. More and more investment is being done on baskets of stocks as these investments became accessible through ETFs and traditional managers were not able to beat the "dumb" indices (there's nothing really dumb about them). Sure, there are funds like the Vision Fund or boutique stat arb funds who still trade individual names, but these are absolutely dwarfed by the size of investments into entire baskets/etfs. The companies in S&P 500 see more liquidity that the entire rest of the US equities combined. And inside that 500, the top 50 again sees more trading than the entire 450 rest combined. So what happens when the market sells off? Everything becomes correlated. All the idiosyncratic effects are overpowered by the overall selling pressure. There'll be companies hit more than others, but there'll be very few (basically none) big names that will weather the storm completely unscathed. This is the effect of being included in the top 1000-2000 companies in the US. The moment your company gets there, you have to accept that in a crash, your stock will do the same as everything else. This behavior also ties back to a broader effect in financial markets, namely that in a market stress, correlations spike. All stocks fall, bonds tend to appreciate (hence stocks and bonds become negatively correlated), by definition, volatility goes up everywhere.
  - throw0101a 7y ago
    > So what happens when the market sells off? Nothing happens. This was examined during the Q4 2018 almost-bear (19.5<20%) market: I am not aware of any data showing that index investors sell off their holdings during these types of events. Do you have any such data? I would hazard to guess we'll see something similar for Q1 2020 fund flows: either neutral or net inflow.
  - paganel 7y ago
    > the top 50 again sees more trading than the entire 450 rest combined. I have no number to substantiate this hunch but I believe that that was one of the main reasons why Boeing's shares continued to still remain at a reasonable level even after the MAX debacle, even though under normal circumstances its shares should have seen at least a 50-60% nose-dive immediately after the first signs of corporate malfeasance. But when almost every big pension fund on the planet has to purchase your shares because it's included in a big index that will never fail of course that the stock market won't "punish" despicable moves like the one committed by Boeing.
- throw0101a 7y ago
  > A lot of trading is done via indexes. So if people are bearish, the whole market ends up tanking. The evidence appears to suggest otherwise. In the previous almost-bear (19.5<20%) of Q4 2018, there were net inflows into index funds. * https://www.morningstar.com/insights/2019/01/28/us-fund-flows-trends https://www.morningstar.com/insights/2019/01/28/us-fund-flow... While a bit self-serving, Vanguard showing that index funds are not a factor: * https://www.vanguardcanada.ca/individual/articles/education-commentary/markets-and-economy/market-downturns.htm https://www.vanguardcanada.ca/individual/articles/education-...
- ngokevin 7y ago
  Lot of Americans are in dire straits and the customer base on the margins can probably no longer afford non-essential things such as Netflix.
- jsight 7y ago
  That's sensible, but there is a lot of fear right now. People are afraid that the recession will be strong enough to cause people to cut services. Similarly, Google is advertising driven. The value of advertising can drop during a recession. I'm not necessarily saying that either of these will happen, but there is risk.
- paganel 7y ago
  > A lot of trading is done via indexes. Indexes are today's CDSes, it baffled me how many people were defending them (in fact, I'm pretty sure the vast majority of people still defends them in one way or another) when in fact it had been visible for at least 3-4 years that they're the new "too big to fail" thing that will bring the whole edifice down at the first signs of weakness. We never learn, we always like to think that there's some silver bullet in finance that will make us earn money almost for ever with close to no risks.
pauljurczak 7y ago
One of the reasons for this is stock market being detached from real economic activity. It is mostly a play field for financial engineering. Hugely overvalued.
- IanDrake 7y ago
  No, its not hugely overvalued. Interest rates are low, where will you get your desired yield? PE ratios are in the normal range. How do you justify your position? What are you comparing it to? RE? RE isn't passive.

deleted 7y ago

[deleted]

AznHisoka 7y ago

A lot of trading is done via indexes. So if people are bearish, the whole market ends up tanking. Stocks like Roku and Netflix should actually benefit from people staying home, but their stock is still going down, because people are just selling the entire index.

short_sells_poo 7y ago
You are correct and this effect is increasing over time. More and more investment is being done on baskets of stocks as these investments became accessible through ETFs and traditional managers were not able to beat the "dumb" indices (there's nothing really dumb about them). Sure, there are funds like the Vision Fund or boutique stat arb funds who still trade individual names, but these are absolutely dwarfed by the size of investments into entire baskets/etfs. The companies in S&P 500 see more liquidity that the entire rest of the US equities combined. And inside that 500, the top 50 again sees more trading than the entire 450 rest combined. So what happens when the market sells off? Everything becomes correlated. All the idiosyncratic effects are overpowered by the overall selling pressure. There'll be companies hit more than others, but there'll be very few (basically none) big names that will weather the storm completely unscathed. This is the effect of being included in the top 1000-2000 companies in the US. The moment your company gets there, you have to accept that in a crash, your stock will do the same as everything else. This behavior also ties back to a broader effect in financial markets, namely that in a market stress, correlations spike. All stocks fall, bonds tend to appreciate (hence stocks and bonds become negatively correlated), by definition, volatility goes up everywhere.
- throw0101a 7y ago
  > So what happens when the market sells off? Nothing happens. This was examined during the Q4 2018 almost-bear (19.5<20%) market: I am not aware of any data showing that index investors sell off their holdings during these types of events. Do you have any such data? I would hazard to guess we'll see something similar for Q1 2020 fund flows: either neutral or net inflow.
- paganel 7y ago
  > the top 50 again sees more trading than the entire 450 rest combined. I have no number to substantiate this hunch but I believe that that was one of the main reasons why Boeing's shares continued to still remain at a reasonable level even after the MAX debacle, even though under normal circumstances its shares should have seen at least a 50-60% nose-dive immediately after the first signs of corporate malfeasance. But when almost every big pension fund on the planet has to purchase your shares because it's included in a big index that will never fail of course that the stock market won't "punish" despicable moves like the one committed by Boeing.
throw0101a 7y ago
> A lot of trading is done via indexes. So if people are bearish, the whole market ends up tanking. The evidence appears to suggest otherwise. In the previous almost-bear (19.5<20%) of Q4 2018, there were net inflows into index funds. * https://www.morningstar.com/insights/2019/01/28/us-fund-flows-trends https://www.morningstar.com/insights/2019/01/28/us-fund-flow... While a bit self-serving, Vanguard showing that index funds are not a factor: * https://www.vanguardcanada.ca/individual/articles/education-commentary/markets-and-economy/market-downturns.htm https://www.vanguardcanada.ca/individual/articles/education-...
ngokevin 7y ago
Lot of Americans are in dire straits and the customer base on the margins can probably no longer afford non-essential things such as Netflix.
jsight 7y ago
That's sensible, but there is a lot of fear right now. People are afraid that the recession will be strong enough to cause people to cut services. Similarly, Google is advertising driven. The value of advertising can drop during a recession. I'm not necessarily saying that either of these will happen, but there is risk.
paganel 7y ago
> A lot of trading is done via indexes. Indexes are today's CDSes, it baffled me how many people were defending them (in fact, I'm pretty sure the vast majority of people still defends them in one way or another) when in fact it had been visible for at least 3-4 years that they're the new "too big to fail" thing that will bring the whole edifice down at the first signs of weakness. We never learn, we always like to think that there's some silver bullet in finance that will make us earn money almost for ever with close to no risks.

pauljurczak 7y ago

One of the reasons for this is stock market being detached from real economic activity. It is mostly a play field for financial engineering. Hugely overvalued.

IanDrake 7y ago
No, its not hugely overvalued. Interest rates are low, where will you get your desired yield? PE ratios are in the normal range. How do you justify your position? What are you comparing it to? RE? RE isn't passive.