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TWO BLACK SWANS – Today’s Market Threats

We are facing the compound effect of two unusual events, a couple of coordinated black swan’s events. The CoronaVirus, an unexpected and virulent pathogen that threatens humanity, and an Oil Price War, started by incumbent oil producers (OPEC and Russia) against U.S. oil shale producers.

It is not an environment for the faint of heart. Late Sunday, S&P 500 pre-market session showed a -5% expected opening. This Monday, the index closed at -7.6%.

The U.S. 10 year treasury rate stopped at 0.49%, and the 30 years treasury rate closed at 0.93%, both at their lowest levels ever recorded. The S&P 500 volatility (VIX) touched a maximum of 61 during the Monday session. The last time we experience these extreme levels was August 2008, during the global financial crisis.

So what caused it?

First, the spread of the Coronavirus pandemic set the stage for today’s terrible performance. Second, the lack of an agreement between the OPEC and Russia to extend their oil production cuts to sustain oil prices.

After the OPEC meeting finished without an agreement, they decided to suspend the oil production cuts quotas and maximize production; this let oil prices collapsed -30% on Sunday night, leaving oil price at 30 USD per barrel. This decision immediately sent big oil company stock prices down (-15%), as well as, small shale players (up to -50%). It is an unusual and Machiavellian time to pursue an oil price war, but it is what it is.

Almost every market assets were down in the Monday session, only the U.S. treasuries, the high-quality short term bonds, and the gold closed positive. It was broad sell-off, one could say this is certain to be in the U.S. finance history books.

The market selling volume was so acute that the market index activated a circuit breaker. The market reached the level one circuit breaker of -7% early in the day. A circuit breaker is an interruption of the financial market trading to curb panic-selling when it hits predefined levels.

There are three levels. The level one is up to -7%, and level two is up to -13%, if activated, they halt stock trading for 15 minutes. The level three is at -20%. This breaker stops the market for the remainder of the trading day; these breakers are set up for market indexes and individual securities. It was implemented by the SEC after the market crash of October 19th, 1987.

From the investor psychological perspective, the future does not look bright right now. But we should remember that we have had virus outbreaks in the past, and they had eventually passed. We have had oil price wars, and they had also ended. So what it may look terrible today, it might not be so in the not so distant future.

This perfectly explains why it is so important to have a portion of your portfolio assets in safe investments. When chaotic events arise, you may use those less risky funds to cover your expenses or to execute opportunistic purchases of risky assets, of course, if your risk profile is appropriated. In this way, you may avoid selling your investments at a loss when you required your funds.

So what could be a possible battle plan ahead? To win the war, first, you have to be prepared.

If you have a balanced portfolio of stocks and less risky assets, your volatility and losses will be less than the market, and you will be able to balance portfolio risks when the opportunity arises, as it is now happening.

You may not gain as much as the market when it raises, but you may obtain even more when you have the chance to buy assets at lower prices—old fashion advice to buy low and sell high.

Besides, there is nothing that can beat a good night's sleep, knowing you were prepared for the right opportunity.



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