We Just Witnessed the Fastest Stock Market Correction on Record | Hacker News Reader

We Just Witnessed the Fastest Stock Market Correction on Record

bloomberg.com

No matter what the official criteria for “correction” is, that word just doesn’t feel right. “Correction” implies it’s a fix for some insignificant thing, like over exuberance/a bubble. But that’s not what’s going on here.

One of the biggest manufacturing economies has essentially shut down. Companies are already warning about significant impacts on quarterly earnings. Those are actual, real things — not people just realizing they got a little too excited.

"Correction" refers to the idea that the market was previously overpriced by 10%. In this case one would say it was not pricing in the risk of the virus correctly, until now.

If it falls 20% from the high, they stop calling it a correction and start calling it a bear market.

Of course, the market went up thirty freaking percent last year to put this price action in perspective.

Saying the market went up 30% last year is a little deceptive. There was a sharp correction in December right before the year started and it was down like 15-20% from the high in September

Yeah, my bet is that the virus is just helping the market get back to normal by getting people to start taking their values seriously. The market has been seriously inflated for a while.

It is interesting, in light of the financial situation, how China and the US are handling the virus. Too attached to the status quo and trying to prevent a more serious correction by downplaying it? Or deliberately under-responding for other reasons?

> Too attached to the status quo and trying to prevent a more serious correction by downplaying it? Or deliberately under-responding for other reasons?

Conspiracy territory, but if I'm not in China I'm quietly hoping it gets crazy for another month or two, drives stock prices down further, and then buy at low rates.

The constant "we don't know what's really going on!" doom and gloom articles make me think they're either pandering desperately for clickbate, or trying to drive the market further down (maybe both?).

> Conspiracy territory

True, I should assume incompetence before malice. Something about it just feels too calculated to me. I guess we’ll just have to wait and see shrug

Something that's never totally clear to me, either on the upside or the downside: say the largest economy in the world is shut down. Even say it stays that way for three or four months. Does that actually mean that the US' public capital has dropped ten percent in value? It's my very strong suspicion that in two years we will be chugging along again as if this never happened. Why is 10% the right number to contract in that situation?

(In case you can't guess, I'm still 100% long.)

Has the US' public capital dropped 10%? No. But prices are the discounted expectations of future profits, and future profits are suddenly less than we expect them to be.

But it could be worse than that. How long did it take the economy to recover from the Black Death? At least 100 years. If too many people die, then yes, the public capital has actually been significantly damaged.

Ok, so I guess it makes sense that the price would drop a lot since near term profits should be weighted more heavily than long term. 10% still seems like a lot with exponential discounting unless this is going to hit a lot harder and longer than I expect.

Well... What I said is kind of the ideal world. The reasonable value of the stock is the time-discounted expectation of future profits. The actual value is heavily influenced by what each person thinks everyone else thinks. So for the price to drop, people don't have to think it will affect future profits at all. They just have to think that other people will think that the price should drop.

As they say, in the long run we are all dead. But ya, economic recessions and corrections are like cutting away dead flesh so the healthy tissue can thrive: in the long run it’s good, but their is pain in the short term.

Think about all those people that felt wealthy based on their portfolio, and were putting money into the economy as a consequence. They don't feel as wealthy now.

They may not feel wealthy now, but unless this is the plague from 12 Monkeys, Asia will recover. If you got hosed in 2008 you're still way up, and will likely be up after this.

And if it is the plague from 12 Monkeys (or The Stand, or other apocalyptic settings) then feeling wealthy is the least of their problems.

> If you got hosed in 2008 you're still way up Except for the fact that the money isn't worth what it used to be.

Or you could look at it the other way, why in the world was +10% up from here the "right number" as to its value. Try to justify that first before questioning the contraction.

Well, sure. It's just that large, fast reactions to relatively sudden events seem harder to justify than large slow reactions to continual events, at least when it comes to an investment with a long timescale.

Correct

Also with 80%+ of all trading being algo, they are chasing each other to the bottom. The actual valuations might have been high anyway, but not to justify this.

We are likely going to hit one hell of a bounce once it does find the bottom.

Or, why do we think the value of everything is known to a precision of less than 10%? Maybe both prices are equally accurate.

Not only that, but the Chinese economy had been teetering along on lots of debt spending. They have avoided a recession at all costs, and that doesn’t make for a very situation when the economy gets stressed, let alone with this huge shutdown. At the same time, the American economy keeps getting juiced by tax cuts, low interest rates, and lots of public deficit spending...

Hopefully this is just a correction, because the alternative is scary and all too likely.

The US economy has avoided recession at all costs also, the Trump administration shamelessly so, with the DJIA ATHs his signature accomplishment. It's crazy to think about but I felt much safer with even the Bush administration handling things in 2008, less pride involved.

It's been ten years of kicking the can down the road, sort of obvious when the stock market flies but there's no change in the average person's life. The hangover's going to be really bad.

I've been in disbelief at stock prices for a long time - but where else can pension funds etc. go?

You could say it's a correction to a risk they were previously ignoring, but even that feels generous.

I wonder though if coronavirus is additionally the excuse (or maybe "catalyst") for a correction that was going to happen sooner or later anyway.

My mental model of the stock market recently is a bunch of people driving too fast on the highway during a snowstorm. As conditions steadily worsen they all know they're not in control, but nobody else is slowing down so they don't either. It just takes some warning sign -- like a truck that's slid off the road -- then they'll all acknowledge the speed is unsafe and slam on the brakes together.

> Companies are already warning about significant impacts on quarterly earnings. Those are actual, real things — not people just realizing they got a little too excited.

But it's not clear (to me) the stock market prices are tied at all to actual, real things. Maybe relative prices of different companies reflect who's doing well compared to whom, but overall the market is up when people expect other people to continue buying and down when they worry they won't (both self-fulfilling prophecies). Maybe the only reason the market dips before recessions is investors expect a decrease in the total amount being pumped into the market by average people's 401k's.

You're forgetting that the stock of more than one company is traded.

Can you explain how that impacts my mental model / questions? Are you pointing out that some companies may be barely affected by coronavirus and some a lot?

Yes, and also some companies may be affected more by their own fortunes, or the fortunes of their particular industry, than by the mood of a monolithic "market."

But it seems to be accepted wisdom nowadays that nobody can pick stocks and beat the average consistently.

So what a large chunk of the market ends up doing is buying index trackers or achieving the same goal by spreading investments as widely as possible.

The nice thing about indexes is there are so many of them...

I read somewhere there are actually more ETFs now than individual stocks.

Benjamin Graham / Warren Buffet have said [1] that in the short run the stock market is a voting machine, but in the long run, it’s a weighing machine.

1. Attribution is murky: https://quoteinvestigator.com/2020/01/09/market/

"Weighing machine" in the sense of "in the time it takes the fat ones to thin down, the thin ones die out", or?..

Strictly in the sense that over time it measures something. In the short term peoples opinions matter, in the long run company performamce matters. The stock price relates to earnings and capital efficicency etc over the long haul.

That makes sense for one company's stock price versus another's. But it doesn't help me understand how the average behaves...

I have the same thinking. I believe every 8 years there is a stock dip, the current one is already overdue.

It's easy to blame Corona now, but there was already one correction coming.

I think it will dip way further, since there are actual problems now also and the spread of the virus globally is not a known fact either.

You’re totally right in your second paragraph with regards to the catalyst, but I disagree there’s not also a bubble which makes this a lot worse.

> One of the biggest manufacturing economies has essentially shut down.

Had shut down. It's coming back online quickly.

Starbucks has reopened 85% of their stores in China. [1] Delta Cargo says 80% of factories in the north and 60% of those in the south are back up and running. [2] The number of new cases is dropping in China [3].

[1] https://www.moneycontrol.com/news/business/companies/busines...

[2] https://www.businessinsider.com/starbucks-reopens-china-stor...

[3] https://www.wsj.com/articles/drop-in-new-coronavirus-cases-i...

Yeah but its just starting in europe.

And Italy is hit pretty hard. They were doing quarantines. But since they realised that no one else will do it. They decided to stop doing quarantines either.

I think we will see pretty bad impact in Europe. Maybe worse than China.

And now there's also a million Syrian refugees heading to southern Europe. What next?

What exactly is Italy's export capacity? What Italian goods do you interact with besides pasta, olive oil, wine, cheese, and the occasional Ferrari?

Let's see how many people are going in those Starbucks outlets.

MarketWatch posits 2 additional reasons (besides the COVID-19 disease outbreak):

• 2020 election

• lofty valuations (highest forward price-to-earnings ratio for the benchmark index since May 2002

https://www.marketwatch.com/story/the-dow-just-logged-its-wo...

> lofty valuations

This is the correct answer. Enormous equity bubble over a decade in the making. There is precisely zero justification for buying index funds at a Shiller PE over 30, yet that's exactly what every price-insensitive investor on the planet, including the SNB, has been doing for years, now.

Every bubble eventually finds a pin. Looks like we finally found one.

Assuming Schiller PE is another name for cyclically adjusted PE, i.e. mean over t in {the last 10 years until now} of PricePerShare(now)/EarningsPerShare(t)

Some stocks for individual companies can have a Schiller PE of over 30, or worse, a negative Schiller PE because on average they've made a negative net profit over the last 10 years, and still be undervalued from a fundamental perspective based on net present value of estimated future net profits. E.g. young business with strong maintainable revenue growth in industry with high fixed costs that needs to increase revenue by another 15% before net earnings become positive for the first time. CAPE is a useful metric but it does not differentiate between a mature company in a downward long term trend versus a young company working toward profitability.

Of course, I completely agree that some stocks with a CAPE of over 30 are overvalued, but that depends on what you believe the fundamental valuation of the particular company in question to be.

I also completely agree that expected returns on invested equity should be relatively low compared to historical returns when buying into an index that is highly priced from a CAPE perspective. Interest rates are low, there's a lot of cash looking for a good investment relative to the number of good investments. Expected returns for investments in equity have been relatively low, compared to historical returns, but what else are you going to do with money to invest right now? Invest it in bonds? Keep it in cash and wait?

If hypothetically the average investor gets irrationally spooked or rationally concerned about price momentum if of their investment time horizon is very short - and move to withdraw e.g. 10% of their stock investments - we should expect to see a large drop in stock market prices in the short term and a corresponding increase in expected yield of stocks as an asset class .

My go-to perspective whenever these kinds of headlines come up:

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"Suppose you’re just starting out as an egg farmer, and your goal is to build up a nice, profitable business. You want to build up a flock of hens so big that they are eventually producing thousands of eggs per month.

You buy your first 100 hens, and they get right to work. You allow those eggs to hatch so more hens can be born, and you also continue to buy hens from the farm supply store. Suddenly your phone rings and it’s Farmer Joe down the road. “The price of hens has just dropped by 50%! You’ve just lost five grand on those hundred hens you bought last summer!”

Is this a sensible way to think about it?

No, of course not. You’re happy that hens are cheaper, because now you can build your egg business even faster.

Stocks are just like hens. They lay eggs called “dividends”, which are real money that can either flow automatically into your checking account, or automatically reinvest itself to buy still more stocks. Some younger companies don’t pay dividends, but that doesn’t mean they aren’t making you money – they are just reinvesting their profits to grow even faster – and eventually become a Super Hen.

There’s only one time you care if one of your shares is down: on the day you sell it."

https://www.mrmoneymustache.com/2016/02/29/what-to-do-about-...

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Unless you're actively playing the markets, or close to retirement, there's nothing really to worry about.

I'm a big fan of MMM however a better analogy would be a disease comes through that makes all the eggs 50% smaller, or leads to 50% infertility.

MMMs analogies tend to assume you're independently financially secure, which is his whole schtick. I love it. But there are people who'll lose their jobs and house in a recession and need to draw down their stock at the worst possible time, not leave it sitting there as the analogy implies.

Such a politely written counterargument.

> need to draw down their stock at the worst possible time

then they're over invested! If they don't have spare money to invest, they shouldn't be. If you lose your job and have to sell stocks to pay rent, then that money shouldn't have been in stocks in the first place. The stock market isn't a place to park emergency money. It's a place you put money _after_ you've paid for necessities and topped up emergency reserves, in the hopes of getting a greater return.

I do think there's still something to be said against the "there's nothing to worry about", which is that people do lose jobs and experience other repercussions during a recession. It's only in the case of investing - and prudent investing, at that - where there's nothing to worry about.

> They lay eggs called “dividends”

only if the hen is actually laying! What if farmer Joe called you up, and told you that people are selling their hens because there's a hen disease going around, and making hens stop laying eggs (at least temporarily). Keeping hens isn't free, so you too, can decide to sell. But may be only hens that have the propensity to catch the disease - some hens are strong and lay eggs.

The analogy isn't, and only serves to illustrate one point of view. The fact that people _are_ selling, is saying something.

He points out elsewhere that dividends tend to remain steady even when the market goes up and down.

during 2008, many companies cut dividends.

The reason sometimes dividends don't get cut even if the market goes up or down has more to do with the real economy - but presumably discretionary spending related businesses would get hit during a virus induced recession, but essential goods related companies would continue to do OK.

I hate this analogy because those farmers are just as likely to go bust due to a crash in the price of eggs. If I bought GE at 40 in 2005....well, I’m probably going to take a loss regardless.

It's only talking about the market as a whole. The market as a whole will go up in the long run. Individual stocks are a different story.

But that farmer was putting all his eggs in one basket (excuse the pun), and, anyways, they aren’t going to realize long term gains in the egg market before the bank forecloses on their farm because they can’t make payments on the loan they used to buy those chickens in the first place.

Who in the world is making payments on a loan they used to buy stocks?

Anyone who is trading with leverage. Think about it: the market is (or was) not, and interest rates are super low. You’d be an idiot to not think that more than a few people are going to try and take advantage of that.

> You’re happy that hens are cheaper, because now you can build your egg business even faster

And so can your competitors. Except each dollar they spend buys them twice the number of chickens. Which means they’ll require twice the amount of certain equipment, which is likely to drive those prices up in the short term. They can also sell their eggs at a lower cost than you. Perhaps lower than you can afford.

Capital costs for an operating business matter. Ironically, they matter less for non-professional investors.

For an investor, both obsessing over and ignoring market signals is a bad strategy. The market may be pricing in new information. Or it might be safe to ignore.

My index fund (or well-diversified, medium-long-term portfolio) is not in a competitive relationship with other index funds. That's not how that works.

This is a bit hazier when we focus on some more detailed points: when a stock pays out some amount of dividend, the price per share of the stock is adjusted downwards by the same amount to reflect that cash has been lost from the company coffers; dividends are often inferior from a tax perspective to capital gains: some companies have a policy of not paying dividends at all!

Due to tax disadvantages, many investors these days might prefer not to be paid dividends and prefer to receive gains as capital appreciation when they sell off some or all stock.

Also, from a control perspective, a minority shareholder is nothing remotely like the same thing as the sole owner operator of a chicken farm.

There's a trend in recent years where some stocks of large profitable companies do not pay dividends. Some of these stocks even have weird voting right structures that reduces the voting power of shares sold to public investors compared to founders, etc. These stocks are arguably worthless from a "buy a piece of the business and hold it forever" perspective of a minority investor: if the company policy is not to pay dividends, and you are a minority shareholder with no voting rights, the only reasonable foundation you have for a nonzero valuation of the share is that "maybe someone else will value it, and I can sell it to them at some future point in time". If you buy and hold you will receive no dividends and not be able to influence the decisions of the company.

This situation is maybe easier to think about in the situation where you are a minority shareholder in a company, and there is a powerful majority shareholder who is not interested in the interests of minority shareholders, and may be able to use that control to extract profit from the business in a way that is not proportionally shared with minor share holders. In such situations the value of a share to a minority shareholder could be dramatically lower than in a different scenario with a different control structure.

We've had single day market "corrections". So not the fastest stock market correction on record. But then again, it depends on how one defines "correction".

1987-10-19 −22.61%

1929-10-28 −12.82%

1929-10-29 −11.73%

https://en.wikipedia.org/wiki/List_of_largest_daily_changes_...

Wish news just stated facts instead of looking for every angle to spice things up for clicks. But then again, bloomberg and most "news" companies aren't in the news business, they are in the ad business. What's wrong with "X index has entered correction territory with Y percentage decline"? Or something like that?

You answered your own question before even asking it. Bravo!

What's up with October? It looks incredibly overrepresented on the top 20 list as well.

October is historically a scary trading month, but I've never read anything arguing there's a good reason for it.

In general there isn't really a good reason for any of it. Most of the markets are based on feelings.

Good eye. It's called the October Effect: https://www.investopedia.com/terms/o/octobereffect.asp

You’re correct. Most sure why you are being downvoted.

They mean "the time interval between the peak date and the date of 10% correction" The data you cited is not that.

Bloomberg is one of the more interesting news agencies in terms of business, especially now that Mike Bloomberg is in the news a lot, diving into the incentives for the news organization to write headlines could be fun, so I'll attempt to answer or shed light on "why" the article headline might be how it is, since I don't believe its for ad clicks from regular readers.

But first, as others have pointed out, the definition of correction is not just "change", there's more to it, so that's why the wiki link you shared isn't contradictory. So I do want to preface the rest of this, by saying that they are "stating facts", since again, Wall Street has a more precise definition of correction.

BloombergNews is actually not in the ad business like most "News businesses". I turned off my ad-block and signed out of my Bloomberg account, then checked the website and there was rare "sponsored content" and occasional ads, yes. BUT according to Wiki: "[Bloomberg] provides financial software tools and enterprise applications such as analytics and equity trading platform, data services, and news to financial companies and organizations"

So BloombergNews actually is in the financial news business, comingling with enterprise software. If you check out their pay wall for regular people, you have to pay a lot for their news (~500 a year, compared to ~100 for WSJ). The news business of Bloomberg was created to service the customers of the Bloomberg Terminals, in the hopes to sell more terminals (85% of their business) - according to Wikipedia. So that raises the question again, why would they spice things up in headlines, since it may not be (solely) for ad clicks?

Clearly, their audience is not ad-clickers. This is news that people see at work, from their 24k-plus-a-year Bloomberg Terminal. And the audience who view it at work is the "Financial" people, who likely work on wall street. Many of these workers read news all day at work, and try to make trading decisions based on the news they read - for example, they may want to sell stocks when the largest manufacturing nation shuts down production due to a spreading pandemic. They are paying for that sort of news.

To dive back into the Bloomberg-side of the business, look past ads clicks and towards their compensation structure for reporters: "Bloomberg News has an unusual practice of paying some of its reporters explicitly for publishing “market-moving” stories." [business insider]

So, reporters have an incentive to write articles that their primary readers would find compelling enough to change their trading behavior.

That said, I can't imagine how this article would actually change the behavior of trading in measurable way, so maybe it's just informative of the scope of price drops in historical context, meant to inform the target audience, and ensure they keep get news from BloombergNews instead of elsewhere.

Citations, Accessed Feb2020 https://en.wikipedia.org/wiki/Bloomberg_Terminal

https://en.wikipedia.org/wiki/Bloomberg_L.P.#Bloomberg_L.P._...

https://www.businessinsider.com.au/bloomberg-reporters-compe...

I’m not sure a run to the banks caused by a virus panic counts as a ‘correction’. More like another wild, speculative swing.

A correction is defined as a drop of 10% (and for reference, a bear market is a drop of 20 or more).

I always tell people: zoom out. The reaction to this dump is quite hilarious when you realize how long this bull has been going.

Literally only a six month retracement.

The article presumes the correction is over. It isn’t.

How many puts have you bought?

Buying VTI dollar cost averaging with some extra money I had laying around. I’ll hold for an extra year to qualify as long term capital gains.

I'd buy puts and write calls on all of the public unicorns in the bay because they're going to take a huge hit on productivity as soon as people start being hospitalized

I put a small portion of my short-term portfolio into shorts on a basket of high-valued, money-losing, non-dividend paying, declining companies last friday. I can't predict how this will pan out but at least it will be a hedge. A full 80% of my non-retirement portfolio was in a short term treasury bond ETF (SHY) after I blanket-sold everything in January to try to make a down payment on real estate. I figured I could handle the extra volatility of SHY over SHV.

We're just as likely to have the fastest correction in the other direction any day now.

That’s how ppl lose money

The operative phrase here is "Never try to catch a falling knife". https://www.investopedia.com/terms/f/fallingknife.asp

You're right, it's likely we'll get a reversal before too long, but how deep this goes and how long it lasts is up in the air.

> ... up in the air.

After the "falling knife" analogy, that phrase took on a whole new meaning...

I've just found that those knives can hit the floor hard and wedge themselves deep into a crack.

If you come along at the right time, and pull with all your might, you can pull that knife right out of the ground like a sword from a stone and become a king...

I'm doing that right now!

It isn't called a correction when it goes up.

This pandemic is almost certainly going to cause a global recession this year. The market will not return to all time highs quickly, but once a vaccine comes out you can expect a "relief rally."

That's one of the most ridiculous takes I've read in quite a while. There's no way the probability of the market starting rapid recovery in the next few weeks is 50%. Just wait until it's officially declared as a pandemic, which is almost certainly going to happen.

Now's one of the best times to start evaluating long-term mutual fund managers based on performance. It's hard to tell who's swimming naked until the tide rolls out. Does anyone have any funds they personally use that they recommend I look at?

This may turn out to be the greatest get rich quick scheme since the great recession.

Almost as fast as a car correcting into a telephone pole!

The more machine trading is in play the faster it will fall

FWIW: the relative obsession with investment strategies as explanations for things like this is IMHO one of the clearest signs we're past the peak of an expansion and "due" for a correction. This happened in 2000 and 2008 too -- everyone online became an expert about this stuff. Then a year later no one wanted to be seen talking about money.

100% agree, if traders had any understanding of Elliot Waves this never would happen.

The same with Bitcoin. It was massive, everyone had an opinion, articles on hn/reddit every single day, now I never see crypto news unless I seek it out.

Out of the 25 corrections charted, the 3rd fastest was in 1955; the 6th fastest was in 1946.

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