Have you ever woken up in the middle of the night after hearing a noise? You lie in bed with your ears listening in, but the sound is gone. However, you can't sleep because you don't know whether if/when that noise will come back, or whether its a threat. So you kind of just lie there, waiting. That is what the market is feeling right now. They are on edge. The question becomes, what do we do next? Do we try and sleep and ignore the threat that may not exist? Or get up and assess it head-on? It is not just the equities market that has been on edge; it's everything alongside with it.
Earlier, senior adviser to President Trump, Peter Navarro, spurred confusion when he replied, "It's over" to a question related to US-China trade negotiations. Markets everywhere acted with ferocity. The SP500, Oil, AUD/USD, and even Bitcoin reacted negatively on the news. However, just think about that for a second – two words were able for investors and traders to go, "alright, I'm out." In regular times, investors and traders would regard valuations as overstretched (as I'm writing this, NASDAQ futures hit their all-time high.) But now? In the middle of a pandemic? It's like everyone has their finger hovering over the sell button, scared of what the future has for their investments.
If we put on our econ/finance 101 hats on, equities are regarded as an anticipatory asset. The market anticipates future earnings and discount them, giving the stock price, however, as this graph from Bloomberg shows.
Expected earnings do not reflect what current prices show. Therefore it's justified that markets are on edge. As Didier Saint-Georges, a member of the investment committee at strategist at Carmignac Gestionput it, "Markets react to the lack of medium-term visibility by shortening their investment horizon - This explains the focus on the immediate recovery, and then catch up by cyclical stocks, but also the fragility of markets."
The oddity here is Gold:
Navarro's comments saw a sell-off in Gold – which is a contrarian move relative to how indices, oil, and AUD/USD moved. This could be due to investors and traders exiting their gold positions to enter riskier assets such as equities.
Traders need to be careful and keep an eye on the news, as the markets will react to any news that may change the fairytail outlook that it is currently pricing in. With investors, with a long enough time horizon, averaging down may be the best balance between being in the markets and getting the best price for your favorite equities.