We all love our Siri’s and Alexa’s, right? They do what we ask in a calm and pleasant way. They make us feel like they care, but at the end of the day, they can’t do the type of intervention that would say, stop you from sending that text we end up regretting, or ordering those shoes we can’t afford.
Alexa is never going to say, “Are you sure you want to text your ex? And Siri is never going to remind you that you are close to maxing out your credit card.
The stock market is running into the same kind of challenges with its ‘almost perfect’ companion, called the algorithm. Algo trades, as they are affectionately called are market transactions that use mathematical models to make high speed trading decisions.
By some estimates, algo trades drive at least 80% of all stock market trading!
One of my favorite things about covering the financial markets for the last two decades is how they were often the perfect reflection of the emotions of the economy and society at any given moment. They fell when we were scared. They rose when we felt better. They stuttered when we were nervous. There is a sweetness to it that I admit, may only be visible to market nerds like myself.
For better or worse, however, they continue to perfectly reflect where we are as a society. Machines are playing an outsized role in executing trades that are supposed to be based on sound human judgement, a reading of economic fundamentals, and the reality of corporate America.
One of the factors these algorithms calculate is volatility, and we all know how volatile stock prices have been in the post coronavirus world. That means these algo trades have been triggering massive sell orders when market swings get wild, greatly exacerbating the price declines, and often failing to factor in the actual value of a company, or the possibility of success in the global war that’s being waged on the coronavirus pandemic.
Fundamental Fallout
While headlines and images of plummeting markets and nervous traders add to our anxiety, it’s imperative that we understand what’s really at play in the financial markets.
Yes, COVID-19 is bringing the global economy to its knees. Businesses have shut their doors. Freelancers, entrepreneurs, side hustlers, and gig workers have seen clients and customers evaporate, and ‘untouchables’ like Las Vegas, Broadway, Disney parks, as well as the workers and industries they support, became immobilized in what seemed faster than a New York minute.
Add to that the pain and fear millions of investors are experiencing as they see their retirement and other investments plummet in value, and you understand why many people would rather give financial folks like myself a ‘pop in the face’ rather than the ‘benefit of the doubt’ when we say “stay calm, don’t panic.”
What Goes Down…
There have been 11 health crises’ in the U.S. over the past 17 years – SARS, Zika, etc. The global financial markets were higher 6 months later for all of them. We are in unchartered territory with the corona virus, but the U.S. stock market remains one of the best games in town for long-term investors, averaging about a 10% annual return since it began. For shorter-term investors, the reality is that money you need in the next 3 to 5 years simply should not be in stocks because you may not have to time horizon to benefit from the inevitable upturn.
Humanity Is For Humans
Technology offers so many gifts. Can you imagine self-isolation without it? Yikes!, Still, like with all things, there is a Yin and a Yang – a duality that can be experienced as positive or negative. While we’ve all happily taken for granted the boost algo trading has given to the bull market, we didn’t pay enough attention to anticipate the bad…To err while happy is definitely human, while Siri stays calm in the most challenging of times.
It’s all about balance, and staying focused on your goals. How are they going to get paid for if you sell your investments without giving them the chance to bounce back?
Big Market Swings Are A New Normal Due to the Tech Evolution
While we are all benefitting from artificial intelligence during this unprecedented time of global turmoil, the key word to focus on in that name is ‘artificial.’ The thing that will get us through this pandemic in all aspects of our lives – financial included – is to remember that our solutions have and will always come from our humanity and true intelligence.