- The market has been caught off guard by the ongoing stock market sell-off, which feels a lot different from past instances.
- Goldman Sachs and Morgan Stanley have been shocked at how quickly equities have sold off and have also bemoaned the lack of alternative options.
If you’re staring at the red on your computer screen, thinking this market bloodbath feels different from past instances, you may be onto something.
For one, the sheer speed and intensity of the drop have left some experts shaking their head. While the stock market‘s overextended conditions had long been expected to result in a correction of some sort, very few people thought it would be this violent.
But here we are, with the benchmark S&P 500 down more than 6% over the past seven sessions after a 404-day stretch without a 5% decline.
Count the equity strategy team at Bank of America Merrill Lynch among those caught somewhat off guard by the rapid selling in stocks.
“If we thought a correction was likely, the intensity of the moves of the last few trading sessions have been a surprise,” said James Barty, the firm’s head of global cross-asset and European equity strategy, who also called the sell-off “more severe than we had anticipated.”
Goldman Sachs agrees. It says the ongoing sell-off has been “significantly faster than usual,” noting that stocks have historically lost 2.5% on average during the first week of a correction, which the firm defines as a drop of at least 10% from recent highs. This time around, the cumulative one-week damage has exceeded 6%. The chart below shows this dynamic in action:
A second factor that makes this equity sell-off unique is how hard it’s been to find relief in the market. Robert W. Baird’s chief investment strategist, Bruce Bittles, said it best on Monday, during the deepest throes of the market chaos: “There’s no place to hide.”
Simply put, this means that as equities have slid, very few other assets have strengthened. Given a better selection, investors might’ve been able to more effectively rotate out of stocks and into another asset class.
The chart below shows just how futile the quest for market safety has been. Of the 20 assets listed, only the US dollar has strengthened, relative to the yen. And even then, the gain has been less than 1%, which pales in comparison with the ongoing stock market wreckage.
So why has this market downturn been so unprecedented? Goldman says a big part of the blame should be directed at robot-driven investment strategies, which have experienced price-insensitive forced selling.
“This S&P 500 correction has been faster and harder to diversify than previous ones,” Goldman equity strategist Christian Mueller-Glissmann wrote in a client note. “We think technical factors have contributed to the recent sharp correction with equity selling/buying pressure from systematic investors.”
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