Market selloff: COVID-19 news 'caught people by surprise' on shortened day, strategist explains

Steve Sosnick, Interactive Brokers chief strategist, examines how to expect market and investor reactions to the new COVID-19 variant in addition to ways the Fed chair Jerome Powell will seek to tackle inflation.

Video transcript

JARED BLIKRE: Welcome back to Wall Street where we have a sell-off underway. You can see the Dow now off more than 950 points, closing in on a 1,000 point drop. We also have the S&P 500 off 2% and the NASDAQ is the least dirty shirt in the laundry basket, off 1.75%. Not shown, the Russell 2000 is off 4%, really getting smacked those small caps today. We want to talk about it all with Steve Sosnick, he's the Interactive Brokers' chief strategist. And Steve, thanks for stopping by on short notice. I'm going to give you the floor here, you know what I want to ask you.

STEVE SOSNICK: Yeah. Well, happy Thanksgiving, Jared. This is one of these days where just I think it's really caught people by surprise. Obviously, any bad news on COVID is bad news and that's pretty clear. I think the fact that we're getting it on what's normally a thin trading day just makes it that much worse. And I think that a lot of US investors were not prepared for it. Global investors certainly took this as bad news. It is bad news potentially.

Now, I don't want to overreact, I'm not a virologist, I'm not an epidemiologist, I don't want to play one on TV but let's hear what the WHO has to say in terms of whether this is-- the contagion level and some of the other factors. But today was clearly what we would consider the classic risk-off day. And what we're seeing is the reversal of a lot of trends that seem to really be baked in.

We were really baked into higher interest rates. We were really baked into a strong market that was somewhat ignoring the backdrop of the monetary tightening around it, and boom, all of a sudden we hit a wall today. And this is-- you know, this is what we get. And you know, one of the other interesting little features is it's a weekly options expiration on a half-day, which already had a little potential to be unusual. And now it's-- we're full-fledged beyond unusual at this point.

SEANA SMITH: Steve, how do you think investors-- since there is so much unknown, like you were saying, we still don't know so many details when it comes to this variant, just how significant, how critical, how important it's going to be here for our fight against COVID here in the US, I guess, how should investors then be positioned, at least in the short-term until we do get some clarity on that front?

STEVE SOSNICK: Well, Seana, this was a real, I think a wake-up call to a lot of people. You know, unfortunately, today we're a little bit sleepy from eating too much turkey but I think that you know, I think people had really gotten-- equity investors, particularly had gotten very sanguine about the risks in the market. OK, we'll deal with the tighter monetary policy that's coming down the pipe, we'll deal with any worries that we have in terms of bond markets backing up and sort of reducing the TINA trade. We'll pretend that we don't have the bond market-- sorry, that we don't have the debt ceiling negotiations going on next week. And all of a sudden you know, we've got a big smack in the face. You know, it's a real reality check.

And I think this is one of those reminders that people have to be concerned about their risk levels when things are good, not when things hit the fan. You know, looking at VIX now, so I'm just turning to another screen, VIX is up you know, 9, 8.5 points. Today is not the day where you're going to find a reasonable time to hedge. The time to have hedged, sorry, was earlier in the week.

Then, I think this is the thing that gets lost among people and that is that markets have a nasty way of biting you at the worst time, just when everything feels great, when there is no alternative, that's exactly when the alternative presents itself. And I think this is the reminder. I don't want to react, overreact one way or the other too much today because hopefully, you shouldn't be too spooked by a drawdown of 2% to 4% in your holdings but I think this is the reminder that says, OK, if a day like today spooks me, I've got too much risk on. And that's-- I think this is your opportunity to try to de-risk, especially if things-- you know, especially if this becomes sort of something that is a worry but not a cataclysmic worry.

JARED BLIKRE: Yeah. And Steve, I really like your comments about the VIX. One of my favorite expressions, I think it's The Market Ear, follow him on Twitter, buy protection when you can, not when you need it. But it's important to think about things today because if you didn't do it already, we've got to make some decisions. One person who's making a big decision right, now really thinking about it. I have it on good word that Fed Chair Jerome Powell is drinking his coffee but I want to know what he's thinking, can you tell me what he's thinking, Steve?

STEVE SOSNICK: I think he's thinking that first of all, he's probably somewhat happy that his bias has been toward accommodation rather than removing the punch bowl even faster than he has been. Remember, the Fed hasn't removed the punch bowl, they've just told us they're going to be much-- they're not going to fill it up very quickly anymore. And I think this is where he's going. And I think he's been on the footing of you know when in doubt be accommodative. And I think that idea is going to serve him rather well.

The fear that I would have if I were him is what if this really is another plague, and I don't really want to get thinking that way but if you're the Fed chairman you have to think about that stuff, or if you're managing risk in a portfolio, you have to think about the worst-case scenarios. What ammunition does he have left? I don't think there's any fiscal ammunition left right now. I mean, we'll see what happens with the bill that's working its way through the Senate at this point but beyond that, it's not clear to me what his moves are going to be other than to continue to go back to QE. But you know, I think right now he's I think breathing at least a sigh of relief that he wasn't more aggressive in removing some of the stimuli that he'd been putting in.

SEANA SMITH: Steve, that's an interesting point, [INAUDIBLE] critics, or some critics I should say, have said that he has been too slow to act, that the Fed seems like it is behind the eight ball when it comes to their monetary policy. A day like today, it really satisfies and I guess upholds what the Fed's approach has been like you were saying. Do you think the Fed is still at some risk though of acting too slowly or is a day like today simply proving that hey, that's not the case, at least for now?

STEVE SOSNICK: Oh, I think right now until or unless we learn you know, what the real risks of this new virus strain are, I think people are reacting first and learning second, which is not necessarily a bad way to go by the way. Because again, if it really is as bad as we think, this is a minor reaction. But I think-- you know, I really do think that's still the policy risk for him. In the US, I mean, unless this thing is truly cataclysmic, do you see any chance of us going back into lockdowns? No. Certainly not in a large number of states that encompass a huge amount of the population, I don't see the political will for it.

And so you know, I think the economy is going to try to get off its rear end as best as it can. And I think that Powell does really run the risk of being behind the curve, so to speak. But today at least vindicates his thinking but it doesn't remove the risks going forward as you know.

JARED BLIKRE: No, and we're going to have to leave it there. But again, thank you for stopping by, always great stuff. Steve Sosnick, Interactive Brokers' chief strategist.