Q: Is the bull market over?
A: It depends — which bull market? Shopping, anyone?
Oct 19, 1987 — Black Monday, where a shocking 22.6% plunge on Wall Street reverberated around the world. All 23 major world markets at that time collapsed: eight of them by more than 20%; three of them by more than 30%; and another three by more than 40%. Hong Kong won the bogey prize — it was down 45.8% — and the exchange had to be shut for a week after.
In serendipitous Sri Lanka, where the wires and fax machines took their time delivering the news, the market was up instead. The market there did not enjoy the benefit of the instant response of the algorithms, augmented by CNBC and Bloomberg, transmitting 24/7 the chatter of price movements, instant chats and spiced by the vicious cycle of squawk box. I am also guessing there was not much by way of foreign fund flows to withdraw then.
I referenced 1987 because Oct 28, 1929, is probably too long ago and by percentage terms, 1987 remains the largest single-day equity market fall. Since then, global financial markets have weathered many other storms. There was the 1997-1998 Asian Financial Crisis and the collapse of the heavily-leveraged hedge fund LongTerm Capital Management. There were also the random see-saws daily during the Global Financial Crisis of 2008, and the demand shock that momentarily sent crude oil into unprecedented negative territory in April 2020.
A fixing at a point in time helped commodity firms like Trafigura, with the ability to store and the gumption to take the risk, earn supernova profits. However, the cost is that structured product investors over in China suffered equally spectacular busts.
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To be sure, the markets today differ from those of 1987, 1997 and 2008. Yes, leverage is now bigger and more decentralised, versus the heavy concentration in banks carried out in 2008. However, conventional financial market infrastructure is now more robust. For example, there are circuit breakers in place, and higher capital requirements have been imposed on clearing houses, banks and exchanges. As such, systemic risks can be better ring-fenced to shield the contagion across markets and geographies.
But temporary perfect storms can still be created. The benchmark West Texas Intermediate (WTI) plunged to as low as a negative US$37.63 a barrel because of a combination of pandemic woes resulting in a drop in demand, excess inventory on hand, disagreement between major producers Russia and Saudi Arabia, and of course, jittery traders.
Such congruence of fatal factors has been playing out recently. Archegos Capital Management, for example, overplayed its hand and had to be carried out, wounding their bankers like Credit Suisse and Nomura along the way.
And might similar scenarios of a perfect storm play out with cryptocurrencies? Are stable coins like Tether actually backed? And what does the US$1 trillion ($1.37 trillion) crypto world actually rest on?
Black Friday blues
Last Friday’s post-Thanksgiving hangover prompted headlines of risk-off all around the world, as a new Covid-19 variant, dubbed “omicron”, reared its potentially ugly head, spooking some countries to shut their borders yet again. It also triggered references to a new Black Friday. The VIX, or Cboe Volatility Index, spiked to 29 (by 50%), and it was risk-off all over the world with WTI down by 12%, the Dow Jones index down by nearly 1,000 points, and the FTSE 100 index losing GBP72 billion ($131.5 billion) in market value.
When Adele crooned in the 23rd James Bond movie, “This is the end / Hold your breath and count to 10 …”, she was seemingly singing to those who were watching screens and not out shopping or plain drunk.
Crypto bros were roundly spanked too. All along, they have maintained that cryptocurrencies are a risk-diversifier that is uncorrelated to conventional assets or safe havens; as well as an inflation hedge. Price movements suggested otherwise. Bitcoin dropped by 8%-10%; Ethereum corrected at a magnitude 4-5 times that of the Dow, the S&P and the Nikkei indices.
The Dow’s near-1,000-point drop is enough to justify Wall Street Journal’s frontpage headline “Dow suffers worst day of 2021”. However, compared to 1987’s 22.6% crash, this less than a 3% drop in the Dow, trading now at around 35,000 points, is perhaps just a necessary pullback to keep some of the stratospheric forward valuations in a few sectors in perspective. Where valuations are backed by scantier fundamentals (or none in the case of some of the metaverse coins), the free-fall is harder to quantify since there is little intrinsic value to measure for a base in some instances.
In contrast, the boring Straits Times Index’s 1.7% pullback on Nov 26 underlies its traditional stability and “port of call in a storm” appeal at half the volatility of most equity indices. There are grounds for this outperformance all year against the Hang Seng Index to continue.
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It’s the weather
In the Age of Sail, the weather could make or break fortunes. The same applied in 1987. The crash was precipitated by a hurricane on Friday, Oct 16, at 2am UK time. Later that morning, London as a market could not function, as no one was at their desks. Market-makers who could bridge Asian orders into Europe and the US did not show up. The stock market was open for business but the electronic SEAQ (Stock Exchange Automated Quotation) system was down. The FTSE was suspended because little volume was being done.
With Wall Street closing 9% down for the week, and when London could not risk manage, headlines over the weekend fuelled the panic and the whole world hit the “sell” button the following Monday morning. An “orgy of selling” resulted from a confluence of market structure coincidences relating to exchanges opening late, futures arbitrageurs mispricing with a lack of efficient data and common exchange standards and rules, as well as fears of regulators shutting the markets.
True, there was an unusual storm in the UK the weekend after Black Friday 2021 with wind speeds reaching nearly 100 miles (161 km) per hour. Up to 100,000 people lost power in Scotland, but that was after the market closed.
Now, leaving out the superstitious omens, the practical reason for exaggerated market moves was simply this: thin liquidity in holiday markets. Folks who were left manning the shop did not want to risk too much capital when spreads across asset classes were wide. Weekly options expiration on the S&P500 Index on a long weekend probably did not help either.
To begin with, Asian markets did not start Nov 26 on a bullish note. The trepidation was exacerbated by news that in an unprecedented move, China has reportedly directed Didi Global to de-list from the New York Stock Exchange. That became another excuse to execute risk-off trades and shorts amid thin markets, which moved easily to trigger technical stop-loss sales across the board. The selling intensified with profit-taking on post-Covid recovery bets like airlines and travel stocks, which then extended to over-inflated stocks and sectors, to USD-JPY trades, and to the WTI.
As such, the S&P500 futures and VIX deteriorated into Europe and the US holiday market hours. Even gold, the safe haven, had a 1% move up reversed by the US close — a sign that in any sell-off, the correlation across diversified assets classes is close to one.
Fire sales and discount bins?
Stop-loss and contingent sell orders, an inversion of trend-following hedge funds followed on these gaps were triggered on thin volume. Some margin-selling from leveraged positions resulted on the day and will follow on for a couple more days to work through the system. But will Adele rule, or will the bells jingle by Christmas?
Markets notoriously can discount anything, including eyeballs, as seen in the dot-com bubble. As the news headlines caught up with the “crash” and some politicians scrambled to adjust their Covid responses — including giving everyone a Cliff Richard “Summer Holiday” in Europe, thus adding fuel to the fire — there could be opportunities to indulge in post-Black Friday sales. After all, retail shoppers were spending on- and off-line — oblivious to the market jitters.
When the markets do find their footing and potentially reverse, the news trying to make sense of the movements will move on to Pfizer, BioNTech, Johnson & Johnson, AstraZeneca and Moderna, which will be scrambling to declare their ability to adapt and to boost (their stock?).
In the immediate aftermath of the World Health Organization declaring omicron “a variant of concern” on Nov 26, claims are already circulating of “100 days to ship” (the new vaccines). Or the story would be a timely fall in energy prices to boost the recovery of the economies, or central bankers holding their interest rate horses!
As we start-stop into the new normal of irrational exuberance punctured with the fear of uncertainty from time to time, it is good to adopt similar maxims from retail shopping that should apply whether or not you were part of the traffic jams on Orchard Road, or queues to get into the stores all of last week:
1. Good bargains and gems can be found with homework and persistence
2. True quality and brands that withstand the endurance of time have better resale value
3. Trends and fads are often left at the bottom of the cupboard or the bin in the next season
4. If it is rubbish at a discount, it is still rubbish.
Fortunes have been made in past fire sales. Happy holidays!
Chew Sutat retired from Singapore Exchange (SGX) in July this year. He was senior managing director of SGX, and member of SGX’s executive management team for 14 years. He serves on the board of ADDX and chairs its Listing Committee. Chew was awarded FOW Asia Capital Markets Lifetime Achievement Award this year.
Photo: Fashionable buys: Trends and fads are often left at the bottom of the cupboard in the next season / Bloomberg
