Stocks Stage Late-Day Rally

Finally! That was the reaction Friday from investors to the stock market rally that occurred in the last 30 minutes of trading. Until that point every rally attempt this week was met with a wave of selling. The Dow ended Friday only down 357 points, or 1.39%, an improvement from earlier in the day when it was down over 1,000 points. You know it has been a challenging week for the markets when you are celebrating a 357 point decline.

There was even better news with the tech-heavy Nasdaq ending the day with a very small gain. Technology has been the most important sector to the stock market over the last few years so it was good to see a strong rally late in the day. What will we be watching for next week? Let’s take a look.

Federal Reserve

Many investors are looking for the Federal Reserve to step in any day now and cut interest rates, with some hopeful it will be a coordinated rate cut with the central banks from Europe and Japan among others. Given that it is a health crisis impacting markets, and not a financial one, we are not sure a rate cut is the right course of action. Fed officials are hopeful that consumer behavior will not dramatically change due to the coronavirus, but we are not sure lower rates are a part of the solution in this case.

Algorithmic Trading

There is no question that algorithmic trading played a part in the wild market swings of the past week. That doesn’t mean that the market shouldn’t have gone lower but the speed and the degree of the moves were certainly magnified due to the algos. Now in all fairness these programs can help the market on the upside, but they are far more impactful during market declines. To illustrate just how volatile markets were this week take a look at one measure of volatility, the VIX, that today hit its highest level since 2015.

Buying Opportunities

There was very little distinction with what was sold this week, with many stocks and ETFs down 15%-20% regardless of the company outlook. This means that there are opportunities to deploy some cash into companies with bright outlooks that were sold by panicked investors just looking for an exit. That said, it is not the time to throw caution to the wind as the coronavirus is not going to go away any time soon and that will remain a headwind for markets.

While it was a tough week to be an investor, times like these are why portfolio construction with an emphasis on risk management is so crucial. We will be ready Monday for what I am sure will be another busy week for markets. Have a good weekend.