One of my close friends from college currently works as a stockbroker with a large financial services company. He is responsible for executing trades via the firm’s proprietary trading platform and his area of expertise lies with the firm’s specialty trading products. Given his experience on what many would consider the “front lines” of the market, I thought his insight would be quite valuable. I’m grateful he was kind enough to set aside time for a brief interview.
He requested that his name and firm remain anonymous, but was open to sharing information about his day to day experience and how that differed from what he has experienced during a truly historic week. He also provided some candid feedback on key market signifiers, the Presidential Address, and the Federal Reserve’s $1.5 trillion injection.
- What is your title and job description at your brokerage?
I’m a client services agent. I work with our trading desk, primarily for our discretionary trading platform for the firm’s financial advisors. Secondarily, I focus on our specialty trading products – primarily fixed income and options products.
- What is a typical day like and how is that different from this week?
A typical day on my team involves assisting advisors with the discretionary trading platform, serving as a middle man between the equity and bond desks, and executing trades related to our specialty products. I also review trade corrections for the discretionary platform. Occasionally, I’ll be tasked with back-office projects related to operations.
This week, our call volume, in general, is through the roof. It’s very difficult to execute bond trades, and I’ve had to review about ten times as many trade corrections as usual. Very hectic, very busy days from market open to market close.
- What are some of the most common trading activities you’ve noticed this week?
Recently I’ve been noticing a lot of clients liquidating their discretionary trading accounts or reallocating their positions into more conservative models. Additionally, I’ve noticed a lot of clients liquidating their fixed asset accounts and re-allocating funds into the equity markets. When reviewing trades placed on our website by clients, I’ve noticed several high dollar accounts placing large positions into the equity market – i.e. the people with a significant amount of capital do not appear to be panicking.
- From your perspective, what is the driving force behind this week’s historic losses and why were they so devastating?
Generally speaking, I think we were due for a correction, or at least a small recession. When you look at market signifiers, such as the inverted bond yield curve, this has been anticipated and overdue. This viral outbreak is simply accelerating it.
- Expand on the notion of market signifiers – what are some of the patterns you’re observing as a broker and why are they relevant?
The inverted yield curve is the biggest sign. I’d say overall, the growth of our economy has been questionable in the last few years. A big event in my eyes was General Electric falling off of the DJIA in mid-2018. It says a lot that the DJ is the yardstick we use to measure the health of our economy and essentially every company on the list is partially to completely reliant on Chinese production. This virus dropped their output significantly the last several weeks and it is reflecting in investors’ perception of the market. The big tech companies on the Dow (Microsoft, Cisco, Apple, Intel) have all of their hardware made in China or other overseas markets. The industrial conglomerates like 3M and United Technologies are much the same. The retail giants rely on cheap Chinese goods flowing in to stock their shelves. You can see how this is a problem.
Beyond this, I’d say the oil situation may actually be more impactful on the markets after China returns to full capacity. There will definitely be at least a brief recession due to the virus, which in a way is good, because it is forcing the market to un-inflate and correct. But the games going on between Russia and OPEC will have a lasting effect. Oil is one of the only things we have been producing domestically. The price of oil has declined gradually from a peak at over $100/barrel during the Obama administration to around $45 before this pricing skirmish began. Now it will likely be around $30 for the foreseeable future. This is very good from a consumer’s perspective though: cheaper travel, cheaper produced goods, cheaper gas. But it is going to hit one of the few functioning American industries pretty hard. I suspect some kind of tariff will need to be applied to combat this issue.
- How would you explain the relationship between novel coronavirus and the financial markets?
I observe a few dimensions of it.
As I alluded to above, the virtual shutdown of the Chinese economy, caused by this virus, has shown that our own economy is de-facto dependent on Chinese Industry. This is a huge problem for the future, that is not being fixed. Trump has paid lip service to the necessity to “bring back industrial jobs”, yet essentially zero progress has been made toward this end so far. It is something that will actually have to be addressed soon, before the US is completely un-industrialized, which will cause an even more severe and long-term decline in investor confidence.
Second, Travel and Tourism industries have also been shut down. You can see this reflected in the prices of Airline Stock, Royal Caribbean and Carnival & other Cruiseliners, Vegas Resort Companies, etc. There is not much that can be done for this until the need to quarantine on a mass scale diminishes.
Third, there is extreme emotion and hysteria involved in a lot of these sell offs by retail investors, or public-conscious institutional investors (like pension funds, endowments, etc). It is a very, VERY good opportunity to buy in if you can see past this. There will only be a few times in a lifetime to invest at such a discount. The wisest thing is to take advantage of it. In 2008 you could buy major companies for literally less than a dollar a share while people were panicking. If you bought Bank of America at its lowest and sold and its peak before this crash, you would have multiplied your money nearly 30-fold.
This isn’t to say that it isn’t being pushed by the institutional investors either though. Earlier in February, Bezos himself sold off billions of dollars of his own AMZN stock. I have heard the same of executives of a lot of companies. I’ve read published rumors of the same for my own firm, where the stock has dropped by half.
- In last night’s Presidential Address Trump outlined three primary responses to the crisis – restricting travel from Europe for 30 days, instructing the IRS to push back the tax deadline, and calling for low-interest loans for small businesses in tandem with a payroll tax cut. Why, in your opinion, did his address fail to quell the markets?
The travel ban basically instigated the biggest drop we’ve seen in a decade. I’m sure there are logistical reasons for it, it definitely seems like something should have been done sooner, but it is difficult to expect the other financial plans to actually remedy the situation. I suppose the tax extension is convenient, but the tax cuts and loans are not going to have an effect until the virus is gone. I think the Fed’s rate cuts are the most significant thing happening right now, but they will need to maintain it for a while, and probably drop rates lower after the pandemic dies down, in order to get us out of the bear market.
Trump is clearly trying to give himself talking points for re-election debates, to point to the things that he did to say he did them. They may end up as good things done to overcome the forthcoming recession, but Corona-hysteria will ignore them in the meantime.
- What do you think of the Federal Reserve’s decision to add an additional $1.5 trillion to the system? Will a stimulus package have any significant or long-lasting effects in this situation?
Will this be necessary? I suppose the answer is yes. I think doing so at this point is completely irrelevant. Dropping rates and expanding the monetary supply doesn’t make a difference if huge portions of huge industries are inoperable due to a viral pandemic. Maybe they are doing such now with the prediction its impacts will begin when things actually start to pick back up.
- Finally, based on your understanding of financial markets, what do you think would be the best approach or set of approaches to stabilize the financial markets?
I don’t think we are out of the woods yet, there will be more panic selling, and the market will zig-zag up and down as it has been, until corona virus isn’t striking fear into the global economy. It is going to be hectic and rough, especially for those working in the industry or people reliant on income from their investments. I think we will see the DJIA decline below 20k, I wouldn’t be surprised to see it bottom out lower than that.
Then it will begin to rise, and stabilize on an upward trend.
You just have to hold fast, keep buying in and you won’t regret it.
Ride the Tiger.
If you made it this far, I certainly hope you enjoyed this interview. It was an absolute pleasure for me to facilitate this conversation. If you found this content interesting, please be sure to subscribe and share it!