Of the top-six worst daily sell-offs in the history of the S&P 500 dating back to inception, one was on Black Monday, Octothree came in 1929 and two have occurred in the past few weeks. The first thing he notes is the prevalence and severity of volatility in the financial markets, as investors attempt in real time to accurately evaluate the economic impact of recent events. Looking at some historical analogues for what we are observing suggests we might have a rough path ahead.īen Carlson of Ritholtz Wealth Management has compiled some scary information. So trying to predict how this particular crisis will play out is next to impossible, but sometimes knowing how we got to where we are can help us understand where we are going. Rising prices drive momentum-induced buying as the fear of missing out takes over, and falling prices trigger loss aversion as sellers rush to get out while they can. Self-reinforcing cycles like this are partly what lead to boom-and-bust behavior. Put another way, in social sciences a cause can become an effect and vice versa, just as confidence can increase skill and that skill subsequently increases confidence. Unlike in physical sciences, the lead-lag relationships of social science variables can and do change over time as market participants learn and adapt. And as my friend and fellow columnist Angelo Calvello recently noted, certain segments of the economy, like restaurants, will indeed be decimated and may not recover at all, as millions of people have already lost their jobs.Įconomies and financial markets are highly complex systems. Even as many people hope for a quick recovery and are already looking to snap up bargains in the stock market, panic buying of non-perishables and hourlong waits at the grocery store tell us that some are less optimistic about any sort of near-term return to normalcy. I’m one of the lucky ones, but it’s still no fun to watch my IRA and 401(k) funds crater as capital markets adjust to the economic fallout. And though I’m sure my wife is sick of hearing clichéd business lingo on call after conference call, I can research and write from my home office. Thankfully, my kids are able to join their classes and do homework online - and even their music lessons have gone virtual, with only a few minor glitches. already leads the world in cases, with nearly 400,000 people diagnosed (although the numbers out of China should be taken with a healthy dose of skepticism at this point).Įven those who haven’t felt the effects of the disease firsthand - like my family and I, who have been on lockdown for more than two weeks - are struggling to adapt to the new paradigm of social distancing.
The past few weeks have seen unprecedented changes in our lives as the coronavirus pandemic has brought the economy to a near standstill.
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