The S&P 500 entered free-fall territory Wednesday, producing the biggest single-day decline since June’s 6% plunge.
Coronavirus infection rate headlines overwhelmed most coverage in the financial press of stimulus and the election. But that’s not a huge surprise.
At this point, a follow-on round of $2 trillion in stimulus appears inevitable, the only question is if happens in a few weeks with Republican support or an even bigger package passes in a few months if Democrats take control. Either way, the free money is coming!
As for the election, most people believe they already know who is going to win; either they believe the polls or they believe the polls are wrong. Either way, neither side has any doubt about the outcome.
And that leaves us with this runaway surge in Covid infections as the biggest uncertainty in front of us.
That said, I don’t know anyone headed for the hills because of this spike in Covid. In fact, I don’t know anyone that changed their behavior because of this latest surge. National and international infection rates have never been higher, yet most people seem to be going about their lives like they were earlier this summer when infection rates were far lower.
Sure, wash your hands, cover your face, avoid large crowds, and all the other sensible things people did this summer. But even in the face of this surge in infections, most people are still going to work and most people are still shopping. And let’s be honest, those are the only things the stock market cares about.
Even in Europe, where infection rates are far higher and their willingness to aggressively lock down the continent earlier this spring, not much is changing because of this surge in infections. It seems most people are already doing everything they are willing to do for themselves and other people and they are comfortable with the risks.
And that leads us to today’s stock market meltdown. I bet most of the people abandoning stocks today at big discounts are not afraid of Covid either. And I bet they are not even predicting another wave of widespread lockdowns. Instead, these people are selling because they think other investors are afraid of Covid and lockdowns.
This is classic herd psychology. I didn’t see the lion, but everyone around me is freaking out so I’m going to freak out too. After all, the one person who didn’t freak out and run was eaten by the unseen lion. Unfortunately, survival instincts that worked so well in the caveman days compel us to do the exact wrong thing at the exact wrong time in financial markets.
Smart money sells because they don’t like their thoughtful outlook. They don’t sell because other people around them are selling. In fact, if they have a positive outlook, they are the first to line up and buy the discounts.
And we don’t need to look far to see the aftereffects of panic selling. Twice since the Covid lows, the market has been hit by big waves of panic selling. Once in June (-6% in one day) and another time in September (-7% over 3 days). And you know what? Both times the bottom was near and that big collapse was a better time to be buying, not selling.
Will this time be any different? Probably not. Prices could fall a little further and volatility will remain elevated until after the election. But the bottom is not far. Maybe we slip and test 3,200 over the next week or two, but don’t expect prices to fall a lot further than that. That said, don’t be foolish and rush out to buy this dip. Smart money buys the bounce and protects itself with a nearby stop. If prices keep falling, no big deal. Their stop gets them out and they try again during the next bounce.
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