Friday, March 13, 2020

What did the stock market do today? It went crazy

The coronavirus crisis has caused an unprecedented level of volatility on Wall Street, accompanied by one day which saw the largest single-day drop on almost 30 years. Why stocks are collapsing is simple: the coronavirus is going to cost every business money, so they will have less profit and pay smaller dividends, so their stock is worth less. Such a correction is actually how the market is supposed to work: prices send signals to tell people what things are really worth, and the stocks are now not worth as much as they were in our recent economic boom.
A more interesting question is why is there so much volatility? It has been reported in WSJ, and is obvious if you look at recent charts of the S&P 500 or the Dow Jones Industrial Average, that most of the volatility is either right when the market opens or right before it closes. They say that investors buy and sell based on news. I think the major institutional investors have ways to buy and sell US stocks while the market is closed overnight, perhaps by using futures which they are covering, and then they all cover at the opening bell and buy their collateral for overnight at the closing bell. Not only is this causing chaotic wild swings every day, but it isn't fair to the small investors who can't afford to do this.
One solution would be for markets to be open 24/7, and be staffed by online systems only, not by floor traders. Such a move would create a more fair and less volatile stock market. If there is news at 2AM and 4AM those trades should be made at those times, not at the opening bell. This (and many other problems) need to be addressed--after the coronavirus pandemic is over.