Capital markets have seen a significant amount of volatility over the past couple weeks. Worldwide cases of COVID – 19 (commonly known as the coronavirus) now exceeds 100,000, OPEC failed to strike a deal to cut production, and all of this is happening within an election year. The volatility this morning triggered a level 1 circuit breaker that halted trading on the S&P 500 for 15 minutes.
There are three levels for circuit breakers within the S&P 500.
· Level 1*: S&P 500 declines 7%, trading pauses for 15 and activates the potential for level 2.
· Level 2*: S&P declines 13% and trading pauses for another 15 minutes.
· Level 3: S&P 500 declines 20% and trading is halted for the remainder of the day.
Circuit breakers were initially implemented following the stock market crash of 1987 and recently updated in February of 2013. These circuit breakers are intended to give investors time to consider their strategy in a steep market decline—the hope is to provide some stability to capital market trading.
As emotional beings, we are wired to think that something must be done in response to these large price swings. Emotional decisions can often lead us to jeopardize long-term goals for short-term volatility.
A diversified portfolio should participate in the up swings of the market and work to mitigate some of the downswings, when possible. There will always be things we don’t foresee and cannot predict—that is how life and capital markets work.
In times like this, it is typically best to sit on your hands and rely on your diversified portfolio to wade through the uncertainty. Oh, and to help curb the spread of COVID – 19, be sure to wash your hands, as well.
*Must happen at or before 3:25pm ET to be triggered.