The stock market seasickness isn’t going away anytime soon.
The Dow Jones Industrial Average shot up more than 700 points on Friday, fueled by a strong job reports and reassuring words from Federal Reserve chairman Jerome Powell. Just two days earlier, the market started the year with a 200-point drop only to close up for the day.
Clearly, the Age of Volatility is just getting started.
Whether it was President Trump and his early-morning tweets, his unusually open complaints about the Fed’s interest rate policies, the end of a very long bull market or something else, Blue Chip stocks experienced an incredible range of movement last year.
Even on Christmas Eve, a normally sleepy time on Wall Street, the Dow fell 653 points, only to make that ground back and more the day after the holiday.
All told, the index lost 7.7 percent last year after jumping 24.4 percent in 2017.
Technology is only adding to the rapid movements. Back when the New York Stock Exchange was formed more than 200 years ago, floor clerks ran stock prices across actual trading floors. Today, clerks have been replaced by machines that trade in nanoseconds.
“We used to talk about people waiting to get reports from their financial advisers the following quarter,” said Gerald Storch, chief executive officer of Storch Advisors, a retail advisory group. “Now they just log online and they find out immediately how much today’s stock market buys affect their net worth.”
That means day traders, instantly aware of massive sell-offs in their favorite companies, are more likely to follow suit. Conversely, when the market rallies, investors are quick to hit “sell” in an effort to increase profits.
Added pressures around the markets, like the president commenting on social media and fears of a recession, are causing investors to panic and trade even faster.
“You’re getting the 2 a.m. tweet. We’ve never seen that from a president before,” said Paul Nolte, portfolio manager at Kingsview Asset Management. “In one moment, he’s very conciliatory. In another moment, he’s very belligerent. I’m not sure the markets know how to react to that.”
Not only that, but the Executive Branch of the government and the central bank haven’t historically made a habit of commenting on the stock market, said Gary Richardson, an economist and professor at the University of California, Irvine. That is, until Trump arrived in the Oval Office.
“Stock markets go up and down,” he said. “So when it goes down, the executive branch doesn’t want to get blamed. They understand that what they say can have an outsized effect on the equity markets. And their public pronouncements can cause a lot of volatility.”
Even so, last year the Federal Reserve said that beginning in 2019 it would hold a press conference following each meeting of the central bank, rather than the normal four scheduled a year, in an effort to increase dialogue with investors. On Friday, during the annual American Economic Association’s meeting in Atlanta, Jerome Powell, chairman of the Reserve, hinted that the bank would hold off on further rate hikes, causing the market to soar.
All the while, long-term investors are thinking big picture. They’re influenced by macro fears that impact the bottom line, such as slowing global growth, continued talk of tariffs and Brexit, and individual companies not growing as fast as before. Share prices of both Alibaba and JD.com fell after their most-recent earnings reports, despite the fact that they’ve increased on top and bottom lines. Investors were fearful that the rapid growth spurt in China might be drawing to a close.
In the coming year, retail and fashion stocks in particular could face even more headwinds from company-specific concerns, such as increased margin pressures and anxiety over inventory levels, making them even more susceptible to market movement.
Case in point: Alibaba closed up 7.1 percent to $139.82 a share on Friday, after closing down in 2018. JD.com also closed up on Friday, 9.4 percent to $22.27 a share. Hudson’s Bay Co. rose 15.8 percent to close at 8.51 Canadian dollars a share, after Thursday’s news of Richard Baker’s move to increase his stake in the company. Another fashion stock that did well on Wall Street included Canada Goose, which rose 6.05 percent to $44.71. Even struggling companies, like L Brands, owner of Victoria’s Secret, Farfetch, Stitch Fix and J.C. Penney all closed up at the end of 2019’s first trading week.
But don’t expect investor sentiment to settle for fashion.
“Because this group, which was long viewed as a secular winner by investors, started to show some signs of weakness, the stocks have come under very heavy pressure,” Ike Boruchow, senior analyst at Wells Fargo, wrote in a recent note. “Specifically, looking at the key e-commerce stocks in the marketplace…we find that the average e-commerce stock is down 49 percent relative to its 52-week high, and everyone is down 25 percent or more. E-commerce stocks have declined basically twice as much as traditional retailers and three times as much as the broader market.”
Given the current political uncertainties and economic environment, volatility then suddenly doesn’t seem that out of place.
“The economy looks like it’s expanded about as much as it can expand,” Richardson said. “There’s not much more room for growth. So you have a lot of projections that say the economy could enter into recession in the next two years.”
For now, at least parts of the expansion are holding on. A very strong 312,000 new jobs were created in December, far higher than the 177,000 that analysts expected. And while unemployment crept up slightly — from 3.7 percent to 3.9 percent — it’s still the lowest it’s been in decades.
“When volatility goes up, a likely explanation could be that big investors are pondering the probability of bad events, like a recession,” Richardson said. “If people think there’s even a small chance of one of these big bad events, they’ll pull back in stocks.”
If last year is any guide, when they pull back, it will be all at once, with another big sell off.