It’s been a while since traders have worried about, well, anything. As the coronavirus spreads, so too does fear. And that means we need to adjust our strategy so we can trade uncertain markets.
During 2019, the dark clouds of a nasty trade war hovered above us. Market action reflected that uncertainty in May and again in August. Who knew how the trade war was going to end? Somehow, there was always hope that a clear solution would emerge, and the trade war would end quickly.
The trade war simmered down during the fourth quarter of 2019, which was reflected in a subdued VIX. That lack of volatility allowed investors to jump in and buy stocks. As a result, the returns in 2019 were robust. Q4 was exceptional with the SPX 500 higher by 8.5% – its best quarter in two years.
However, that was then, this is now. And when there is no clear solution, we become fearful.
How to trade uncertain markets
Now we have a new crisis to consider, and no – it’s not impeachment. (It should be a concern, though many seem to believe they know the outcome). Our new concern is the rapid spread of the coronavirus. Thousands are infected, the number of deaths keep growing, and no one knows how it spreads or how to contain it.
Based on past epidemics (like SARS), we know the coronavirus will eventually be contained. So why are the markets so fearful?
We don’t know how this will play out, and we do know that it’s disrupting global travel and trade. That uncertainty is a good excuse to sell. With markets up sharply in Q4 last year, it’s a great time to take a few chips off the table and sock away some profits. The markets are not going anywhere.
When the news breaks that the coronavirus has been contained, money will pour back into the markets.