The New York Stock Exchange floor is no longer this full, but the market remains open. Photo by Christine Puccio.
If I told you that the value of your investments just dropped, you would consider it bad news. But if I told you that you can’t sell those investments to get quick access to your money, chances are you would consider this news much worse.
That would be most people’s reaction, anyway. Even so, in times of severe market volatility (only the kind of volatility when stocks go down, never when they go up), we inevitably hear ill-informed or possibly ill-motivated calls to close the markets.
Such calls are somewhat understandable when they come from individual investors. Many people overestimate their tolerance for risk as they plunge into the stock market when times are good and volatility is low. They may find themselves overextended, in need of cash to sustain their living standards. Or they may need it to handle major commitments, such as a house purchase or a child’s tuition, which they thought they could comfortably fund by tapping their portfolios. As that portfolio’s value declines, these investors become anxious. Or investors may simply become fearful because everyone around them is fearful; the human instinct to follow the herd is strong. So when news from the stock market is bad, there is a tendency among some to advocate shutting off the news by shutting down the market.
Such calls should never come from financial professionals – but they do, at least to a certain extent. The Wall Street Journal reported earlier this month that some major money managers, whom the Journal wasn’t able to identify, had urged a governor of the Bank of England to consider temporary market closures amid the growing concern about the coronavirus pandemic. The news outlet said a majority of institutional representatives on the conference call gave the sound, contrary advice to leave the markets alone to do their assigned jobs of matching buyers with sellers. In Canada, the CBC reported that a Citibank analyst also called for regulators to consider shutting down the stock market, as the Toronto Stock Exchange mirrored the mid-March equity rout in the United States and Europe.
These people ought to know better. It is possible that they do. Financial professionals are still people, after all, and people do not always behave rationally in a panic. It is also a personal challenge to face clients who expect you to increase their wealth over time, and to tell them that – for now – the current is flowing strongly in the other direction. If you have not prepared a client (or yourself) for these inevitable fits of volatility, it is tempting to blame the marketplace that reflects volatility in its daily movements. It is even possible that some calls for market closures come from organizations that find themselves deeply on the wrong side of certain trades that they would prefer not to have to recognize right away.
But blaming the market confuses cause and effect. Sure, if a hurricane or tornado is coming your way, you could turn off the weather report. It does not make you safer – quite the opposite. It is exactly the same with trying to turn off the financial markets. Markets reflect the immediate needs and future expectations of buyers and sellers. Those needs and expectations don’t go away if markets close.
Maybe in the middle of a market panic I really believe my securities are going to permanently decline even further, and I want to get out to avoid taking bigger losses. Or maybe I just want to lock in the cash I need for that house down payment or that next tuition bill. Either way, when I bought a publicly traded security or a mutual fund, I expected to be able to liquidate it in the normal course of market business. Listed companies go to considerable expense to ensure that I have that ability.
Similarly, buyers who are in the market amid a panic expect that things will get better within the time frame they are willing to hold the investment. The long-term buyer, or for that matter the short-term trader, is exactly the person that the would-be seller needs to meet at that moment. The market’s function is to put these people together and assemble enough bids that each can be reasonably sure of getting what is, at that instant, a fair price.
What do you achieve by shutting the market? You deprive the small investor of access to ready cash. You turn the large investor, under enough pressure, into a private seller. After all, securities can be traded off the exchanges, too – just not at such a transparently reliable price. If a mutual fund, for example, is under pressure to meet redemptions, it has to know the market value of the securities it holds, and it has to find a buyer. Closing the markets impairs those functions. (In reality, if the markets close, most mutual funds will simply suspend redemptions. This, too, is to the detriment of individuals and businesses who need their money immediately.)
Financial professionals should understand these things at least as well as their regulators. For now, though, it appears that the regulators are the more sensible and well-informed. None has agreed to shut markets amid the current pandemic. Treasury Secretary Steven Mnuchin has been especially forceful about the wisdom of keeping markets open. And Securities and Exchange Commission Chairman Jay Clayton has spoken out against the predictable calls to ban short selling, in which investors who expect stocks to decline further borrow stocks in order to sell them at current prices. Those stocks, of course, all have willing buyers at those prices. Barring short sellers reduces the market’s ability to meet existing demand without artificially driving up the price, which is what critics of short selling are actually trying to do.
Instead of agreeing to panicky calls to manipulate or close the markets, regulators have taken reasonable steps to help the financial system function better during the public health emergency. The Federal Reserve has flooded the financial system with funds to prevent the sudden crash in demand from converting a liquidity crisis into a solvency crisis. The same is true of the role of the $2 trillion CARES Act in its support for consumers and private businesses in the broader economy. The SEC has allowed mutual fund sponsors to provide financial backing for the funds they operate. It also permitted the New York Stock Exchange to move to all-electronic trading. The transition away from the centuries-old trading floor helped enforce anti-viral social distancing. It also happened so seamlessly that nobody who does not work on Wall Street would have noticed.
U.S. stock markets have closed temporarily in the past, of course. Mostly this has been due to short-term physical disruptions such as blizzards, the 9/11 attack on the nearby World Trade Center, and Superstorm Sandy in 2012. The stock exchanges closed for more than a week in early 1933 when newly inaugurated President Franklin Roosevelt declared a one-week bank shutdown amid the Great Depression’s financial crisis. It also closed for four months following the outbreak of World War I in 1914 – an era when very few households held any stocks.
The Citibank analyst the CDC cited described the efforts to control and treat the pandemic as “a World War against the virus.” But battle metaphors aside, a pandemic is not a war. It does not destroy physical capital en masse, and its effect on the workforce looks almost certain to be much smaller than a World War, even if its toll in human life is nothing to take lightly. It is up to us financial professionals to remind everyone to keep their heads, rather than to amplify misguided calls to shut markets down.