Everyone is Getting Pulled into the 2020 Vortex — Even the Quants

By TradeSmith Research Team

The year 2020 is going to be wild. Not only that, the entire decade will be wild.

We’ve done a lot of research on this — and our conclusion is that the 2020s could look like a mix of the 1930s and the 1920s combined.

In some ways, that’s a good thing. The 1920s saw a mind-blowing technology boom, and the 2020s will, too. But in other ways it’s a terrifying thing. The 1930s was one of the darkest decades of the 20th century, and the 2020s will echo that darkness.

We don’t have to wait for the early warning signs. They are already showing up. As the legendary gonzo journalist Hunter S. Thompson once said: “When the going gets weird, the weird turn pro.” The markets in 2019 are already weird.

The S&P 500, for example, is up more than 25% as of this writing — its best performance in years. And yet Wall Street’s professional investor class is struggling below the surface.

Hedge funds, for example, have seen monthly outflows for most of the year, even though the major indexes are way up. Even more curiously, the quants are scratching their heads.

Georg Elsaesser, a European money manager, told Bloomberg his investors are worried by choppy quant fund performance.

“Some of them are kind of scared,” he said. “They’re asking the questions: Is something going wrong? Is something broken?”

What’s broken is the sense of “normal,” in terms of the factors and statistical relationships that drive a “normal” stock market. We have left normal far behind as of this writing. That’s been true for a while now.

Also, for a little while now, it has been “normal” for human money managers to express confusion, even as the quants smile and make money. This was chalked up as the slow but steady rise of the machines, with computer programs dominating their flesh-and-blood counterparts. 

But now the quants are confused, too. Like human money managers, even the computers are shooting blanks — as the S&P 500 keeps rising. Things are getting weirder.

In our view, the impact of 2020 is already being felt. The weirdness of the current environment is advance notice for the even greater dislocation that is next. In 2020 alone we will have to deal with:

  • Raised stakes for the U.S.-China trade war
  • The 2020 presidential election
  • Heightened tensions with North Korea and Iran
  • Increased threat of downturn or recession
  • The introduction of central bank digital currencies
  • Political instability in too many countries to count
  • The aftermath of the Silicon Valley unicorn bubble
  • Accelerating impacts of a budding retirement crisis
  • Quantum computing, artificial intelligence, and machine learning advances

And that is just the tip of the iceberg — or rather, multiple tips of multiple icebergs.

The stock market is staying strong, meanwhile, likely in part because a significant number of investors went to cash or reduced their exposure in 2019, due to heightened dangers and expectations of a downturn — only to feel forced back in as the market kept going up. 

Call it “the 2020 Vortex” if you will. Things are likely to just keep getting more chaotic and harder to read.

And yet, staying on the sidelines will be hard for most, and impossible for many, if stocks keep going up.

That could very well happen, too. A further rise for stocks — culminating with an epic blow-off top in the summer or fall of 2020 — is one of the many possible scenarios that could unfold.

It’s not a time for hard predictions in terms of “this is what the market will do.” Instead it’s a time to prepare for wildness, and a whole range of scenarios, some of them quite positive to some very dark.

In terms of where the market goes, and what investors have to deal with, there is a range of plausible outcomes we could see, some of them wildly different from each other.

The thing to do is remain nimble and flexible, with an ability to respond in real time to whichever scenario takes hold.

If you are personally feeling worried or confused or out of step with markets right now, don’t worry. Even the quants are feeling that way — and their mathematical formulas were supposed to keep them detached.

To use one last metaphor, the 2020 vortex — the sheer strangeness of a year ahead, plus an acceleration of destabilizing events all hitting at once — could wind up sucking us all in, like a typhoon that pulls in ships on the Pacific Ocean.

Every investor, every trader, and every market participant will have to deal with this in some way or another. But we can navigate what’s coming, and profit from it. As the saying goes, “a smooth sea never made a skilled mariner.”

We will be using all our skills, and the best of our software, research, and tools, to help you survive and thrive in the turbulent times ahead.