Tim Hoyle, CFA, Co-Chief Investment Officer

NYSE Applies Circuit Breakers as Crude Oil Drops Most Since 1991

This morning the New York Stock Exchange halted trading for 15 minutes as the S&P 500 fell 7%. “Market-wide circuit breakers are important, automatic mechanisms invoked if markets experience extreme broad-based declines. They are designed to slow the effects of extreme price movement through coordinated trading halts across securities markets when severe price declines reach levels that may exhaust market liquidity. Market-wide circuit breakers may result in a temporary trading halt, or under extreme circumstances, close the markets before the normal close of the trading session.”1

Stocks today are reacting to a 20% decline in oil prices after negotiations between Saudi Arabia and Russia to curb production fell apart. Low oil prices are great for the consumers’ pocketbook, but now that the United States is a more significant oil producer, pumping more than 11 million barrels per day, our economy is levered to the commodity’s price as well. Many energy companies are poorly capitalized; hence their debt is rated junk. Today, the iShares High Yield Corporate Bond ETF (HYG) is trading down 5%. At Haverford, our focus on Quality precludes us from buying junk-rated debt, which doesn’t exhibit the protection of other fixed income securities.

Living through this type of market volatility and uncertainty can be scary and disconcerting. Long-time investors will recall we have felt this way before, many times in fact. Every bear market of the past 40 years has been sparked by uniquely different catalysts, but they all have one thing in common. They end.

Today’s OPEC news and the ongoing coronavirus crisis are both classic examples of exogenous shocks. We are confident, based on the precedent of the past, that these too shall pass. Low oil prices beget higher prices, the virus threat will dissipate, and the Federal Reserve is taking the appropriate steps to ensure ample market liquidity. Markets drop like elevators on bad news but rise like escalators on the expectation of improving news. As long-term investors we are recommending our clients stay the course because we believe it is impossible to time the market.

Investors selling in reaction to bad news are often unlikely to buy back until the news is markedly better. Markets do not bottom on good news. By the time the narrative has changed and crisis is fading, stocks will likely be much higher than they are today. We know it is hard to imagine today, but the underlying fundamentals do exist for higher stock prices.

1 Ken Polcari, NYSE floor trader