Were algorithms behind stock market plunge?

Portfolio manager explains investment strategy after volatility hits indexes

Were algorithms behind stock market plunge?

Rob Tetrault stuck to his investment philosophy yesterday and got busy trading, putting the headline-grabbing global equities sell-off down, in part, to algorithms and high frequency.

The head of Tetrault Wealth Advisory Group said the correction, which hit hardest on Monday as US stocks tumbled 4.6% before yesterday’s marginal rally, is painful but healthy.

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But he added that blaming the market plunge only on investors’ fears over inflation and interest rates just does not add up.

“We were sitting here and in a matter of 15 minutes we lost 1,000, 1,200 points,” he said. “I didn’t even have time to put in trades and the market fell 1,000 points, so there’s no way that’s retail, institutional or pension. It can’t be in my opinion, it was just too quick and too much.

“I think part of it is for sure, for sure, for sure, algorithms and high frequency. But part of it is interest rates, part of it is people waking up and saying that once you start going down that path of [being] down 300, then it’s advisors and retail taking profits.”

Tetrault said the market shake-up allowed him to exercise his philosophy of putting cash to work when there is a fall of about 10%. Having already outlined his approach with clients, he admits it was time to put up or shut up.

“So this is a day where we always tell our clients, when there is a 10% correction, we’re going to buy.  We’re not going to buy the whole thing but we’re going to accelerate the legging-in process and that’s what we are doing.

“We’re putting in trades, we’re buying, but that doesn’t mean I necessarily think that we’re done. In fact, be prepared for more volatility is what I would say.”

He added: “This is where we earn our keep, right? It’s important to reassure our clients that we remove emotion from the process, be confident in our strategy. That’s why you set up an investment philosophy ahead of time, so that when you are in the midst of a 10% crash and the markets are down 1,200 points, you are able to follow the rules that you set.”

Tetrault said that for all the hyperbole around the indexes this week, investors must keep things in perspective after enjoying an excellent run.

“[A drop of] 4.6% … it’s big don’t get me wrong, it’s not pleasant, I get it, but it’s not the worst day in the stock market. We would have had to lose 6-7,000 points or something like that to compete with October 17, 1987, which was 22%.

“So keep things in perspective. Part of the note I sent yesterday was, it’s not fun but we’ve basically lost the gains of the year. The gains we had last year are still on the books.”

Reg Jackson, co-CEO and vice president at JMRD Wealth Management, says the volatility means there are buying opportunities in top-quality equities for the long term. He said that a rise in bond yields sparked the sell-off frenzy, but that he still expects equity markets to post gains for 2018.

“After a strong 2017, the new year started with additional strength for most equity markets around the world,” he said. “The financial press regularly pointed out the lack of market volatility in 2017 as measured by the VIX and it was this lack of volatility that provided a certain level of comfort for investors as witnessed by the heightened levels of bullish sentiment.

“That sense of calm came to an end as a result of the move in the US 10-year bond from 2.40% to over 2.85% in a very short period of time. This concern of rising rates within a strong economy has led investors to question how quickly rates will rise in 2018 – not only in the US but around the world.

“Also, record levels of leverage in the financial markets are most likely exacerbating the downward moves in financial markets as margin calls lead to risk-off trading.”

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