- The stock market had its worst sell-off since June last Thursday.
- Michael Gayed, Lyn Alden, Michael Venuto, and David Dziekanski break down the drivers behind the drop, its implications going forward, and how investors can position their portfolios over the coming months.
- Click here to sign up for our weekly newsletter Investing Insider.
- Visit Business Insider's homepage for more stories.
The stock market had its worst sell-off since June last Thursday, with the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all dropping more than 3% in intraday trading.
After weeks of smooth sailing, what triggered the sudden and sharp plunge, and what is its significance looking forward as the election nears?
Those were some of the questions that Michael Gayed, portfolio manager of the ATAC Rotation Fund at Toroso Asset Management, posed to guests during his weekly happy hour webcast last Thursday just following the market dip.
He was joined by Lyn Alden, founder of Lyn Alden Investment Strategy, and two money-managing colleagues at Toroso — Michael Venuto and David Dziekanski — among others.
Below is a compilation of their explanations and advice given during the webcast — which acted at times as a makeshift postmortem of the sell-off — as well as Gayed's insight given in a Sept. 4 interview with Business Insider.
What caused the sell-off, and what is its significance going forward?
There seemed to be no broad consensus over what caused the sell-off, at least among the group in question, with explanations ranging from none at all to the lack of further stimulus.
Gayed alluded to the sharp drop — following a steep rise — in options trading for large-cap tech stocks as one of the reasons for Thursday's decline.
"In an environment where people are taking more and more risks, whereas options are supposed to be derived from stock price movements, options can also drive stock price movements," Gayed told Business Insider. "Stocks impact options, but now options are impacting stocks."
Still, he said he doesn't believe it to be a fundamental shift leading to a decline as steep as in February and March.
"It almost feels too easy to be the start of something major — I'm not saying it can't be, but everyone is so nervous about equities that the moment there's one of these air pockets, everyone starts thinking it's going to be a second March," Gayed said. "And yet with the VIX where it is, historically this is actually where you'd want to start buying equities."
Alden counts herself in the camp believing the recent dropoff in fiscal and monetary stimuli — which have propped up markets — finally manifested itself in valuations.
"I would describe it as Wiley E. Coyote running off a cliff," Alden said during the webcast. "All that money printing that we were referring to kind of stopped like a month ago, unemployment checks just shrank when August started, there's no more stimulus checks in the mail, money supply is not rapidly increasing, and the Fed's balance sheet is not rapidly increasing,"
She added: "All that kind of stopped, and the market just didn't get the memo. So it is quite possible to get a pretty significant pullback based on valuations and sentiment."
Venuto said he thought volatility related to the election and a turn in sentiment were the driving market forces Thursday. He sees a worse sell-off coming later in the year.
"Other than hope for more stimulus, what is the good news? Why does it keep going? We all know we're going to have a contested election either way. It doesn't matter who says they win that day, we're going to have two or three months of pegs and not knowing what is the outcome," he said.
He continued: "Markets hate uncertainty. I don't know why it happened today, but it did. Do I think it will be a prolonged thing? Probably not. I think the prolonged one is going to be in November and December."
Meanwhile, Dziekansky found himself without explanation.
"I think what's scary is there's no definitive thing you can point to to what really occurred [Thursday], and what I found interesting is that it was just totally wacky…maybe we're at a point of irrationality," he said.
He added that looking ahead, government stimulus is going to have less of an ability to inflate asset prices, like it has since March.
"What we do think is there's less of an upside from all those punches of stimulus. Stimulus punches might calm the market, but it's not going to be what causes the next 30-35% like last time," he said.
"You really need some sort of way to grow the economy outside of this, and there just doesn't seem to be any clear path, especially with all of this election stuff coming around the corner."
Portfolio advice as the election nears
Gayed said a major theme heading into November is going to be how inflation and reflation — or the government's attempt to stimulate the economy — will drive a rotation from growth stocks into value. More specifically, he flagged a move into the energy, financials, and materials sectors.
"The Fed is telling you they want to get an average inflation target above two percent, which means they want more inflation," he said.
"The dollar is weak, which means inflation. And yet, all the money, on a residual basis, has been chasing tech. But the things that are most sensitive to inflation are really energy, materials, and financials because of interest rates and the yield curve."
He added that it's likely investors see a "tectonic shift" where tech stocks cool. At the margin, that would be beneficial for financials in particular, followed by energy and materials.
Investors looking for exposure to these sectors might consider the Vanguard Financials Index Fund ETF Shares (VFH); the Fidelity MSCI Energy Index ETF (FENY); and the Vanguard Materials Index Fund ETF Shares (VAW).
Asked about portfolio recommendations in the context of the sell-off, Alden said she uses a counter-cyclical approach with ETFs, increasing risk when a drop occurs. To inform her individual stock picks, she said she watches long-term fundamentals.
"Most of it is based on fundamentals. So valuations, rate of change, economic indicators, policy responses, things like that," she said. "And then sometimes a basic technical signal — if all the fundamentals are pointing in one direction, and then we get a sell signal or a buy signal, that's when I pay attention to that."
Source: Read Full Article