Here’s Why Stocks Haven’t Dropped Off Even More Steeply

Here’s Why Stocks Haven’t Dropped Off Even More Steeply
Theodora Lee Joseph, CFA

over 1 year ago1 min

Mentioned in story

The S&P 500 is down 24% this year, and while that may seem steep, the fall actually could have been much worse. In fact, asset insurance has been a sort of hidden hero, preventing a more painful selloff. These inexpensive insurance contracts, more commonly known as “put” options, give investors the option to sell an asset at a guaranteed price (strike price) when market prices move lower. And they do their best work in times like these – when market prices are falling.

With the market heading south, many hedge funds have chosen lately to exercise their contracts. This in turn has helped prop up their returns and prevent a sharper market selloff. It also explains why the market’s decline has been more measured, spread out over a few months as opposed to weeks. Historically, investors have bought these contracts on the market and on individual stocks in equal parts, but lately, investors have been at least five times more keen to insure themselves against the movement on single stocks (dark blue line) than on market index movements (measured by ETFs, pink line).

The fact that this is happening now isn’t altogether surprising. Stocks aren’t moving as collectively as they once did: instead, returns are more dispersed, with underlying company performance driving the bulk of the stock performance. The past decade’s winning recipe of relying on a certain sector (like tech) or country (US stocks), or even theme (ESG) no longer guarantees you easy returns. It’s why, as we previously highlighted, it’s more important now to do your homework and make sure you know the reasons why you own each stock in your portfolio. And it’s why a little insurance is so attractive now…

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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