The stock market has given investors a wild ride in 2020. In the face of a global pandemic, the roller coaster of gains and losses has been unprecedented. Recent news indicates that the market may be showing signs of fractures, but not necessarily clear breaks.
There had been fears of a ” correction” or ” flash crash” in the market that could result in extreme losses. The S&P 500 had been at its highest levels in five years before dropping 11% in a single day in March. Since then, it has generally recovered and remains above the pre-coronavirus peak levels.
However, there have been recent signs of stress in the market that could foreshadow future disruptions. The market’s cyclical nature is driven by emotions as much as news and data and recent events could be cause for concern.
The first sign of stress has been the divergence in stock performance between certain companies. Over the past year, technology stocks have largely outperformed the rest of the market. Companies such as Apple, Microsoft and Amazon have seen their stocks soar despite the uncertainty and economic turmoil created by the pandemic.
However, other companies have suffered more. Retail, travel and hospitality stocks have been among the weakest performers. Many of these companies are struggling to stay afloat as the pandemic continues.
Another sign of stress has been the run of outflows from certain stocks in recent weeks. Big investors have been dumping stocks in favor of cash and bonds, signaling their skepticism for the market’s future prospects.
Finally, market volatility has been extremely low, which could be a sign of complacency. When volatility is low, it can indicate that investors don’t expect large changes in the market and may be taking too much risk.
The market may show signs of stress, but it is not clear if the fractures will result in clear breaks. The outlook for the market, and the economy in general, remains uncertain.
Investors should understand the potential risks of the market and make sure they are properly diversified across asset classes. By maintaining a well-rounded portfolio and remaining disciplined in their investment decisions, investors can continue to navigate the market despite the stress fractures.
