Markets - Minor Correction? (Edit: Question Answered)

aroominyork · 2 March 2020 at 10:54AM

bowlhead99 said:

aroominyork said:
Sue was discussing "cash(ing) in for now". While that may be at a profit since originally buying the investment, it is crystallising a loss resulting from the current event (eg coronavirus). And selling "for now", implies intending to re-buy at a later date. Hence this person is unable to see through the dip and hopes they can time when to re-buy. That sounds to me like not having invested according to your risk level.

People don't go broke taking a profit. Seems like having assessed the circumstances they consider they would be better off with other assets at this point in time. This is something that active investors and fund managers do. Likewise institutional investors such as pension schemes will change their asset allocations from time to time. This does not mean they have accidentally invested out of line with their risk tolerance. More that they are conducting ongoing risk analysis and looking for value where it presents itself.

There can presumably be two main reasons for selling assets in the current situation. One is strategic reallocation, which is what I think you are referencing, bowlhead, and which one of your other posts over the weekend shows you were doing - better positioning yourself in the current situation. The other is fear of increased losses, and that is what I read Sue's post as describing: cashing in "for now" because, for example, your family respoisibilities mean you cannot afford greater losses, and then buying back when you think the worst is over. To me that still feels like having invested above your risk level.

Lungboy · 2 March 2020 at 10:56AM

Ftse dropping back now, 1.25% up now from well over 2.5%.

tropic_of_cancer · 2 March 2020 at 11:08AM

OK, many people (though not everybody) have been saying that nobody really knows which way the markets will move next. But IMHO, in addition, when they have moved, nobody really knows why.

We can make up reasons all day, for any market move, up or down. The market's gone down because coronovirus is worse than we thought, or it's not being dealt with properly, or the effects will be wider than was previously appreciated, or the original fall was underdone, or it has just been the catalyst for market participants to notice weaknesses in the global economy, or to notice that valuations were overstretched. The market has gone up because coronovirus isn't as bad as we thought, or at least it is being dealt with properly, or doesn't affect all market sectors equally or at all, or the fall was overdone, or there will be a stimulus to counteract the effects on the global economy, or most valuations were not overstretched anyway. There are a lot more than 2 plausible reasons why the market might move, and there are only 2 directions it can move in! It's an all-you-can-eat smorgasbord of reasons! And therefore pretty much worthless

.

There is perhaps an exception for genuinely new information, when it is important enough to outweigh all the other possible explanations for price moves. IMHO, a proposed stimulus programme doesn't really count as genuinely new information at all, because that's exactly what one would expect the authorities to do in any sufficiently big crisis. So it's not as if investors marked prices down in response to coronovirus, and on the assumption that we'd have to get through any crisis without assistance from a stimulus programme; they already knew that a stimulus was likely if things got bad enough.

aroominyork · 2 March 2020 at 11:13AM

Lungboy said:

Ftse dropping back now, 1.25% up now from well over 2.5%.

Thanks for updating us - that's very helpful. Could you please do so every 90 minutes and also keep up updated on pork belly prices and the temperature in Magaluf.

Lungboy · 2 March 2020 at 11:57AM

aroominyork said:

Lungboy said:

Ftse dropping back now, 1.25% up now from well over 2.5%.

Thanks for updating us - that's very helpful. Could you please do so every 90 minutes and also keep up updated on pork belly prices and the temperature in Magaluf.

It was in response to people talking about the markets opening much higher than friday, that's all. No need to be sarcy.

MarkCarnage · 2 March 2020 at 12:15PM

Lots of different strands developing here......
FWIW, I don't think it's correct to make an assertion that there is a single reason for people selling. Some may have invested above what their true risk tolerance is, some may be realigning asset allocations - including decisions already taken before the setback began.
Another point to note is that if you take account of the 'de facto' easing that's already taken place in discount rates as well, the real falls in markets are somewhat higher than the actual falls. Typically by about 20%. So a 10% fall in market prices is actually about 12% when the easing in market rates already seen is taken into account.
Another aspect is trying to disentangle what might be called the estimated economic impact (growth, corporate earnings etc) from the risk premium impact, and that's pretty challenging to do ex ante, but clearly a lot easier in hindsight when the former becomes clearer.
However, if we assume, rather arbitrarily, that it's around 50/50 (you can make your own assumptions on that) , then the implied impact on this year's corporate earnings is around 50% fall, and that's pretty indiscrimate across different markets and sectors - yes there are differences at the margin of course, but these are secondary. Implied impact on GDP is about 5%. These are big numbers, so a lot is already in the price I suspect.
Therefore the key question for me isn't about 2020, it's about what follows, and in particular, has CoVid exposed the deeper fractures and weaknesses in the global economy, which might mean that risk premiums stay elevated or go higher, and that earnings don't recover that fast.