The Dow Jones Industrial Average completed an epic three-year round trip on Wednesday, at one point dipping below the level at which it sat when Donald Trump first became U.S. president in January 2017.
The latest leg of the sharp sell-off, in which the Dow has shed more than 10,000 points in five weeks, once again saw circuit breakers temporarily halt trading.
The index closed down 1,338 points, or 6.3 per cent, at 19,898.92, but dipped below 19,732, where it closed on Jan. 19, 2017, the day before Donald Trump became U.S. president. The index traded below that mark shortly after 12 p.m. EST and the final six minutes of the trading session before a late bounce allowed it to close just above.
A 963-point loss, meanwhile, left Canada’s S&P/TSX Composite Index at levels it hadn’t traded at since August 2012.
“The volatility you’re seeing underscores the underlying fragility of investor sentiment,” said Candice Bangsund, vice president and portfolio manager at Fiera Capital Corp. “This is really reinforcing that we haven’t hit a sustainable market bottom.”
The level of volatility is unprecedented, Bangsund said. For the first time in history, the S&P 500 has had seven consecutive sessions where it has been up or down at least four per cent. The previous record of six consecutive sessions occurred during the Great Depression in 1929.
The CBOE Volatility Index, which is often used to measure fear in the market, is reflecting this behaviour and is trading at levels not seen since the financial crisis. The index had its highest ever close on Monday, reaching 82.69 points and falling just short of an intraday record set in October 2008.
The extreme volatility is making it more difficult for investors to discern any patterns to assess how close a bottom may be.
Hugh Johnson, the chief investment officer of Hugh Johnson Advisors LLC, has been tempted to buy into the market. “I’m drooling across the board,” said Johnson, referencing the current valuations in the consumer discretionary, communications, industrial and technology sectors. But he’s tuning them out because he suspects that the current downturn will still produce more damage.
Goldman Sachs strategist David Kostin warned investors in a research note this week that the S&P 500 might only bottom at 2,000 points — another 13 per cent drop that would see it return to a level it last traded at in 2016.
“The market has gone from being meaningfully overvalued to meaningfully undervalued,” Johnson said. “I don’t recall seeing numbers as attractive as they are now but I’m not stepping up to the plate and starting to buy because we don’t know what the future will bring.”
Johnson was already in the business when the U.S. stock market crashed in 1987 on Black Monday. What makes the current slide more frustrating is that he believes a significant portion of the volatility is being fuelled by algorithmic trading — preset formulas some investors use that trigger trades based on inputs such as volatility.
The coronavirus outbreak itself, Johnson said, should not be enough to inject this much volatility into the markets.
“There’s no question in my mind that algorithmic trading is turning small declines into big declines and small gains into big gains,” Johnson said.
Johnson is looking for three buy signals: A peak in pessimism, which he said is nearly occurring, good news on the coronavirus containment efforts and any sign that the economy is ready to kick back into gear.
Until he receives them, Johnson is bracing for further swings like what he saw out of the Dow between Monday and Wednesday. A near 3,000-point loss on Monday was followed by a 1,048-point gain on Tuesday. And those returns were obliterated as soon as the market opened on Wednesday.
News of a $1 trillion stimulus package brought investors some excitement on Tuesday before reports that U.S. Treasury Secretary Steven Mnuchin warned senators that U.S. unemployment could reach 20 per cent due to the coronavirus outbreak flipped the sentiment again.
“You’d think the market would be welcoming $1 trillion in potential stimulus,” Bangsund said. ” (But) investors remain beholden by every virus-related headline.”