As stocks plunged toward their harrowing, bear-market lows earlier this month, Omega Advisors CEO Leon Cooperman infamously railed against algorithmic traders and HFT for creating distortions in the market that caused the cascading selloff (though, as we joked at the time, no fingers were pointed when stocks soared off the lows following a massive pension buy order).
Has Cooperman blamed the algos for the Dow rebounding 700 points from the lows?
— zerohedge (@zerohedge) December 6, 2018
Though the Dow’s biggest one-day point gain on record was likely spurred by pension fund rebalancing (or the frontrunning of said rebalancing), the scrutiny that this month’s volatility has brought to algos and their potential to amplify selloffs and rallies (even when there’s no clear catalyst for such moves) due to their trend-following nature has been perhaps the most salient takeaway from the worst December for US stocks since the Great Depression.
With mainstream investors finally questioning the very integrity of the markets and their ability to accurately set prices – a phenomenon that we have been warning about for some time now – Bloomberg’s editors decided that now would be a good time to remind their readers of every major selloff of the 20th century as a way to nudge the market that selloffs like the one we just endured are quite “normal”, and have been happening since the days when order tickets were written up by hand (don’t tell that to any of the hedge fund managers who will be shutting down their hedge funds as a result of December’s bizarre market violence).
In any case, as Bloomberg claims, vicious selloffs like the 20% drop we just witnessed are “far from unheard of.”
While any 20 percent sell-off hurts, the one happening now is far from unheard of in terms of depth or velocity. Over the past 100 years, there are almost too many examples to count of stocks tumbling with comparable force.
“It’s an inevitable process,” Marshall Front, founder of Front Barnett Advisers, who began on Wall Street in 1963. “It goes on over and over again.”
In fact, selloffs like these are “very normal”.
“This is very normal. It unnerves people because we’re all talking about it all the time,” said Nancy Tengler, chief investment strategist at Tengler Wealth Management. “It’s in our face more. We have too much focus on the day-to-day or minute-by-minute or second-by-second movements. Historically, is this normal? Yes.”
And traders shouldn’t be so quick to blame quantitative traders, HFT and passive investors.
A fair amount of complaining has gone on in recent months about the role of high-frequency traders and quantitative funds in the drubbing that reached its peak around Christmas. Perhaps. Those groups are big, and in the search for villains, they make easy targets. Treasury Secretary Steven Mnuchin is among the people who have made the connection.
One thing that makes it tough to lay blame for the meltdown on machine-based traders is the many past instances when markets fell just as hard without their help. The Crash of 1929 is one big example. However bad this market is, it’s a walk in the park compared with then.
In fact, the biggest, most volatile swings in the market occurred back in the 1920s and 1930s, when algos were still firmly within the realm of science fiction.
“The largest percentage changes, except for 1987, were in the ’20s and ’30s,” said Donald Selkin, chief market strategist at Newbridge Securities Corp. “You had dramatic moves then and you didn’t have electronic trading then.”
So, without further delay, here’s BBG’s roundup of 20th century market downturns that happened well before algos dominated the trading environment.
Dot-com Bust
The dot-com bubble that had been developing since the late 1990s popped in March 2000, when the S&P 500 lost 35 percent over the course of two months. It took the Nasdaq Composite Index, which peaked at 5,040.62 on March 10, about 15 years to get to its old high.
Black Monday of 1987
The S&P 500 rose 36 percent between January and August 1987 in what was set to be the best year in almost three decades. Then the October sell-off pushed the S&P into a 31 percent correction over just 15 days, much of it occurring in that one infamous session.
1974 Sell-Off
The worst year since 1937 for the S&P 500 saw the index fall 33 percent in 115 days as a weakening economy, rising unemployment and spiking inflation pushed investors to head for the exits. Stocks subsequently rebounded, surging more than 50 percent between October 1974 and July 1975.
1962 Rout
Investors of a certain age may recall 1962, when the S&P 500 Index lost a quarter of its value between March and June 1962. The rout known as the Kennedy Slide came after the S&P 500 advanced 79 percent in the prior four years. The S&P 500 was essentially flat over the next two decades.
Not So Fat ’57
A dive in car sales and slowing housing construction pushed stocks into a 20 percent correction over 99 days in 1957. This preceded a recession that saw the U.S. gross domestic product contract 10 percent in a matter of three months in 1958.
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To be fair, we haven’t heard anybody argue that algos are solely responsible for the December selloff. Most arguments – at least of the arguments that are being taken seriously – are slightly more nuanced. With market liquidity at record lows, with 85% of the market on autopilot, and the Federal Reserve siphoning off $50 billion each month from the liquidity tidal wave that sent sticks higher in an almost uninterrupted rally over the past decade, the notion that algos played an important role in the selloff isn’t speculation. At this point, as we’ve been saying since 2009, it is established fact.
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