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Members of the Wisconsin National Guard test residents for COVID-19 at a temporary test facility in Milwaukee. Wisconsin currently has one of the highest positivity rates for COVID-19 in the nation.
Scott Olson/Getty Images
Don’t blame this stock-market swoon on a black swan.
The Dow Jones Industrial Average DJIA, -2.98% was down nearly 800 points, or 2.9%, on Wednesday, after falling more than 900 points at its sesion low. The S&P 500 SPX, -2.97% shed 2.9% and the Nasdaq Composite COMP, -3.05% dropped 3% — with all three benchmarks erasing October gains.
The selloff, which follows a tumble for European equities, puts the major U.S. indexes on track for their biggest weekly fall since March, when equities plunged to their bear market low as the pandemic forced a shutdown of much of the global economy. The drop comes as COVID-19 cases in the U.S. and Europe rise, prompting renewed shutdowns by Europe and sparking fears of a slowdown in activity that could derail the economic recovery from the earlier shutdown.
But the pandemic never went away, and the threat of an autumn rebound in cases as cooler weather returned was long identified as a potential risk. That’s far from a black swan, an improbable and unforeseen event that has an enormous impact.
So why do investors seem surprised?
“Traders have been caught off guard by the rapid rise of COVID-19 cases in Europe, primarily because the background level of infection there was assumed to be low enough to ward off a cycle as bad as the spring’s,” said Jim Vogel, executive vice president at FHN Financial, in a note.
Instead, the resumption of travel around the region and unchanged behavior patterns from the summer, when risks of spread were lower, have proven to be potent forces, he said, noting that the worry for U.S. assets is that the country may be just three to four weeks behind Europe.
Germany and France, the eurozone’s two largest economies, on Wednesday prepared for new restrictions to combat a surge in cases that has swept across Europe. German Chancellor Angela Merkel warned that the country’s hospital system cold be overwhelmed.
In the U.S., the number of new confirmed cases on Tuesday topped 70,000 after hitting an all-time high of more than 80,000 at the end of last week. The seven-day average of new cases hit a peak for the pandemic on Monday, according to a Wall Street Journal analysis of data compiled by Johns Hopkins University, signaling that the spread of the virus is accelerating.
Vogel said the real puzzle posed by the stock-market selloff is why investors haven’t learned that lockdowns, while painful and expensive, haven’t yet done “lingering economic damage” that’s impossible to address.
Vogel offered some reasons for what he described as market confusion. These include, he wrote:
1) Investors have demonstrated they are not efficient at trading events such as the pandemic, starting out too nonchalant then transitioning to confidence in central banks and vaccines, only to lose confidence when predictions of a difficult winter prove correct. 2) The near-term impact of the US election has been blown out of proportion for 2021, when it is more likely to kick in over 12-18 months. 3) Money managers refuse to wait for developments to unfold on the belief the only source of value is to front run everything.
Not everyone agrees, however, that investors have had a tough time getting a grip on the pandemic — or that the rise in cases is even the main reason for this week’s stock-market slide.
“We are, and will remain, reluctant to ascribe daily capital markets volatility to incoming virus-related data for one simple reason: investors know how to read,” wrote Nicholas Colas, co-founder of DataTrek Research, in a Wednesday note.
Anyone paying the slightest bit of attention to the news over the last several weeks was well aware that the situation was worsening in both the U.S. and Europe, he said.
Instead, it’s more important to look at how rising cases translate into consumer behavior — and therefore affect business activity. On that front, he noted that Google searches for the have been rising since a mid-September low and are up 32% over the last six weeks (see chart below).
Searches for “covid.”
Google Trends
That’s not great — but it’s more important to note that search volumes are still 38% below the mid-July peak even as case counts hit new highs, Colas said.
Separately, he noted that the Cboe Volatility Index VIX, +17.84%, a measure of volatility expectations for the S&P 500 over the coming 30 day period and a de facto gauge of investor nervousness, lingered at elevated levels longer during the 2008 financial crisis than it has this year.
“Both the Google trends chart and the 2008/2020 VIX comparison tell the same story, namely that humans (and by extension, markets) have adapted to the realities of this year’s public health challenges,” Colas said.
