A View on Recent Global Market Activity
Market insights from the international investment professionals at Euclid Advisors:
Up until last Friday, April 4, the global equity market seemed to be going along as planned. Then all of a sudden – at about 11:30 a.m. Eastern – the ground shifted. We believe funds managed by algorithm, quantitative-based shops, took over. It wasn’t a case of “risk off” vs. “risk on”. The equity markets were sliding because the larger-weighted names that had done well were declining, while stocks that had not been doing well, came to life. Even utility names that had been performing well, started to sink, even though they are inarguably “risk off” investments.
Despite global equity markets declining, emerging market (EM) equity markets, which had been acting well for about a month, moved appreciably higher, as did material names (perhaps related to the move in EM equities). These are not considered “risk off” investments. The “algo” funds were looking at even minor changes in trend. They compete against themselves to be first, and they control large amounts of capital. Add to that more fundamentally based portfolio managers who started to panic, and the rotation was on from whatever had been working, to whatever had not been working.
It is interesting that Wednesday’s Federal Reserve minutes (from the March FOMC meeting) alleviated the trend briefly, but yesterday’s positive news on the U.S. labor front (a significant drop in initial jobless claims) could not stem the trend that started last week. If history is any guide, the quants will stay in until they hit the second derivative of momentum (increasing at a decreasing rate), and then perhaps this trend will reverse. For example, seeing health care firms go up while Brazil sells off may be an indication that the current storm has blown through.