The Market is Just a Bunch of RobotsAugust 9th, 2019 by Tanner Wrisley
Recently, on Monday August 5th, the stock market took a large dip with the Dow Jones Industrial Average falling about 540 points or 2%. This drop came as a result of the latest tariff news given by President Trump himself, that he will be imposing more tariffs on China. This day and age, these market movements happen almost instantaneously thanks to new technology. Artificial intelligence and trading algorithms team up in an attempt to be the first to react to any economic or market news. This is why we are seeing large, quick sell-offs, following one piece of news.
The way these algorithms and AI work is by looking for key words and specific data from news events. Maybe Trump tweets that he will increase tariffs on China. Maybe Jerome Powell, the Fed Chairman, comments that he doesn’t expect to lower interest rates again this year. Or maybe it is as simple as economic data showing that new housing starts have decreased. Whatever the case may be, large money managers have algorithms built in to their trading systems to try and sell on news as fast as they can.
But what happens the next day and the days following? Looking back on this week, on Tuesday the market opened up and ended the day gaining back half of what it had lost on Monday. And by the close of market on Thursday, the loss was completely erased. So what does this mean? For the most part, at Anchor Bay we view these algorithms as multiplying the market’s propensity to overreact.
Even without robots doing the trading, the markets have always had a tendency to sell-off too much in a given day, only to come back the next day or following days with positive results. So when these algorithms and robots are introduced, the selling and snap decisions are magnified. In fact, many of these same algorithms will also sell if the market drops to a certain point, again multiplying the affect from one piece of negative news.
At Anchor Bay, we view these robot sell-offs as great buying opportunities. We are very careful to be in tune with the economy and in some cases, news is material enough to change our outlook on the market’s direction. However, if we believe the market is still in a good position for growth, days like Monday are like a flash sale on stocks. Getting discounts and saving on costs are a few of the things we emphasize and believe help give our clients an improved chance for growth and performance.