Check the algorithm

These are paradoxical times indeed. We live in an era of unprecedented scientific and technological advancement, but headlines might sway one to believe it’s all getting a little too apocalyptic. Floods here, wildfires there, the hottest winter on record in Europe… War. . . and a plague of locusts in Africa. Throw coronavirus into the mix, and you’d be forgiven for thinking this is the half-baked plot of a Hollywood director throwing every fear-inducing disaster they can think of at the audience just to get its attention.

Meanwhile, the Lens is staying focused. 2020 looks set to be another year of volatility and we’re ready for it – virucide by the sink – so you better grab that popcorn, or stock up on those staples, and keep an eye on those share prices. We’ve been watching them closely, and recent market behaviour got us thinking. And asking questions.

Prior to the market plunge on February 24, and after the initial dip when coronavirus spread fast across international news headlines, stocks rallied to record highs. The bull market kept calm and carried on (for a while), as though the virus had no impact at all and China’s influence on the global economy was inconsequential. Why?

Some experts say that algorithms were driving valuations. Last year it was reported that passive equity strategies had surpassed their active stock-picker counterparts for the first time in history. Passive strategies are machine-driven and rules-based, just like smart beta and, at least predominantly, quants. Because of their nature – their calibration, their code – it seemed like money was chasing money creating a positive feedback loop in the system.  

And now it’s volatility again – was that a bubble pop, or should we just call it a correction? March 9th saw the biggest rout since the last financial crisis, and then signs of recovery once more before Trump’s European travel ban sent shockwaves through the markets again. A week later, and the market chaos continued. On March 17, US stocks saw their worst fall since 1987.

In conversations with thought leaders in the industry, we found that consensus was that a crash was coming – it was just a case of when. Value was always going to win out, even if share prices were being distorted by algorithms.

So what now? Guess the markets, buy the dip, stock up on toilet paper if that’s your thing. Some will get rich, for sure. Others will see their pension funds diminish (hopefully only over the short-term), and fund managers are likely to see more redemptions.

We could philosophise for days about the whats and the ifs – but if these last few weeks have shown us anything, it’s that uncertainty prevails yet again. In this macro-environment, the start of the decade was never going to be mundane.