The Pause That Refreshes?

This morning, the New York Stock Exchange paused trading for 15 minutes after the S&P 500 fell 7%, to 2,764.21, just after 9:30. It was the first time the exchange had suspended trading since December 2008, in the middle of the global financial crisis.

No doubt, your phone and/or email exploded this morning with news alerts as trading halted, so I wanted to take a moment to explain what’s happening and why. In times of extreme volatility, I find it helps to put events into perspective, and to focus on the things we can control.

Why Did Trading Stop Temporarily?

Trading paused on the NYSE this morning because of market-wide “circuit breakers” the Exchange put in place after the Black Monday crash of 1987. It works like this:

  • If the S&P 500 declines 7% or more in price as compared to the previous day’s closing price, the NYSE triggers its level 1 circuit breaker by halting trading for 15 minutes. The purpose of this pause is to slow the effects of the extreme volatility that could affect market liquidity.
  • If the S&P falls by 13% or more, a level 2 circuit breaker will trip, possibly causing another 15-minute trading halt. That’s because timing of price declines also plays a factor in these triggers. If the decline occurs between 9:30 am and 3:25 pm ET, trading will be halted. However, if the decline occurs after 3:25, the NYSE will not halt trading.
  • If the S&P falls by 20% or more, the Exchange will trigger a level 3 circuit breaker, and will halt trading for the rest of the trading day.

The NYSE hopes that short pauses in trading can stop any market-wide hysteria from feeding on itself. Literally, like the Coca Cola ad campaign that (ironically) launched in 1929, the Exchange wants these to be “the pause that refreshes” ­­— a pause in which traders stop, take a deep breath, and realize what they’re doing.

In addition to the circuit breakers you’re hearing about today, the markets have other safeguards in place to regulate the volatility of individual securities and set contingency closing prices.

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What Led to Today’s Pause?

 Today’s circuit breaker actually got its start over the weekend, after Saudi Arabia announced it would discount its crude price and raise production. Traders interpreted this salvo as the start of a price war, and sent oil prices down sharply. Saudi Arabia took action after Russia announced on Friday that it would not curb oil production to help calm the market’s nerves over the recent coronavirus chaos.

According to an article in the Financial Times, Russia wanted to understand the full impact of the coronavirus on oil demand before it made a move, but it may also have wanted to hedge against the U.S. shale industry, which has experienced enough growth to eat into Russia’s market share.

Like the story line of Peyton Place, the tale of what’s happening in the markets can be both shocking and complex. It’s also something over which we have no control.

Now What?

We know that markets fluctuate daily, and that sometimes, one or more events can cause significant declines. While it’s certainly anxiety producing, exiting the market and then watching stock prices rebound can be just as unnerving, and it can affect your overall investment experience.

If there were no such thing as uncertainty, there would be no reason for investors to earn a greater return! So, if today’s news has your heart palpitating, remember this: investors who have realistic expectations and who take a long-term view of the markets, understand why some investments have higher expected returns. Proper diversification, prudent investment management, and a goals-driven approach to asset allocation can help see investors through a downturn like this. These are things you can control, and they’re our focus at AMDG Financial.

Please feel free to reach out to us with any questions. In the meantime, turn off the news, take a deep breath, and recognize the value in doing nothing. When the stock market’s roller coaster ride is over, you’ll still be in your seat, safe and ready for what’s next.

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