Market Minute - March 9, 2020
by Dan Zalipski, CFA
Circuit Breaker Triggered
The market is negatively reacting to two developments over the weekend. The first of which is the latest on the Coronavirus. Italy took the drastic step to quarantine 16 million people, more than a quarter of its population, across the northern part of the country in a desperate bid to slow the spread of this disruptive virus. The second development was related to the energy markets. Saudi Arabia and Russia failed to come to an agreement to cut oil production in a bid to support prices. In response, Saudi Arabia announced deep discounts to buyers of Saudi crude, along with an increase in production of at least 10 million barrels per day. This one-two punch created such intense selling pressure at the open that the market’s ‘circuit breakers’ were tripped.
It may come as a surprise to learn the market has ‘circuit breakers’ (also known as trading curbs), but they have been in place since the late 1980’s. The NYSE sets three levels of breakers at the start of each day. Based on the S&P 500’s movement, the first breaker kicks in at a 7% drop and halts trading for 15 minutes. The second breaker would kick in at a 13% drop with an additional 15-minute halt. The third and final breaker would trigger at a 20% drop, and halt trading for the remainder of the day. The purpose of these breakers is to halt trading for a short amount of time to allow accurate information to flow amongst market participants. This also give investors an opportunity to pause, take a breath, and make rational fact-based decisions rather than volatility-driven emotional ones. The circuit breakers were revised to their current form in 2013.
Volatility like what we saw this morning is extremely uncomfortable for those relying on their investment accounts to fund their retirement. It is for this reason we typically keep six months or more of cash needs out of the market to prevent having to sell on a day like today. Keeping emotions in check on days like today is very difficult but making split second decisions is not a sound long term investing plan. The Vantage team is here to help guide you through this volatile time.
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