Not Lovin’ It

Image source: JStone, pathdoc - Shutterstock

What's going on?

Investors cried themselves a river on Monday, after a global sell-off of stocks – one of the most severe in recent history – triggered a US stock market circuit breaker.

What does this mean?

Between the coronavirus outbreak, the ongoing oil supply battle, and rising geopolitical tensions, global stocks have taken a bruising. Those in Asia fell by more than 3%, in Europe and the UK by more than 5%, and in the US by an initial 7%. That Stateside drop was the most notable: it triggered a “circuit breaker” – the kind first introduced after 1987’s Black Monday stock market crash, which aims to halt stock prices in freefall – and automatically froze stock market trading for 15 minutes. If stocks had then continued to fall to the 13% mark, there’d have been another 15-minute break – and if they’d hit a 20% drop, the stock market would’ve shut down for the rest of the day.

Why should I care?

For markets: Emotional support bank.

As investors sold off risky stocks, they clamored for the relative safety of US government bonds. That demand pushed their prices up and yields down, since the two move inversely. In fact, all US government bond yields fell below 1% for the first time ever. It now looks like that’ll push the American central bank to step in again: the Federal Reserve announced on Monday it’d increase its support for super-short-term loans to help keep markets working smoothly – and perhaps to give last week’s emergency interest rate cut time to feed into the economy at large (tweet this).

The bigger picture: Margin bawl.

One reason selling tends to lead to more selling is the existence of “margin calls”. That’s where brokers ask investors who’ve borrowed cash to boost their returns (i.e. those who have used “leverage”) to put more cash into their accounts, or face having their investments liquidated. To get that cash, investors sell off other holdings – compounding the downward trend.

Originally posted as part of the Finimize daily email.

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