Volatility, Extended Edition

Market Update, 2020-03-02: Last week US equity markets experienced volatility not seen since early February 2018. After holding up throughout mid-February this year, equity investors sold stocks with aggression. The S&P 500 fell 11.5%, while the Dow was down 12.4%.  In percentage terms, the decline wasn’t in the Top-30, but it was still an aggressive move down. All major markets and North American sectors were caught in the full-scale selling last week. “Low volatility,” “safety” sectors were hurt equally as hard as “high volatility” growth stocks.

Causes, volatility and response

A combination of program selling by risk parity funds, algorithmic traders and fear, caused volatility to surge last week. To put it in perspective, this ‘vix-fear gauge’ on Friday, sat at levels last seen in the wake of the U.S. credit rating downgrade, European crisis; and the February 9, 2018, “Vol-Armageddon” ETF spike. I remind readers, that these extreme spikes in volatility and fear were all near market lows not highs. Because of this, we were net buyers of equities for clients late last week.

The decline over the past 10 days, which accounted to a loss of just over 12%, is similar to other market corrections this cycle. This includes the August 2011 correction that saw the index shed exactly 13% over five days.  It also mirrors the same percentage decline as the two prior major virus declines with the SARS decline in 2003 and ZIKA in Q1 2016 equaling about 13% each.  Readers may recall that the markets regained their highs within six months of these declines.

Covid news

As of this morning, there was good news overseas over the weekend with China cases looking to have peaked, and the rate of change slowing, which is clearly good news. Additionally, because of this, the overall number of outstanding cases started to decline late last week even with the pickup elsewhere.  This weekend the USA had its first virus confirmed death with someone with pre-existing health conditions.

While negative year to date, investors might be stupefied to understand that year to date two of the best performing stock markets in the world are China and Italy.  As far as stocks goes, it looks like a case of “FIFO”: first in, first out.

Rally starting? Volatility

This morning, U.S. equity futures are back up above 3000, up over 2% on the day as the late week volatility spike subsides somewhat at the front end of the volatility curve.  This is generally what happens as rallies start.volatility

Worries about the global spread of Covid-19 and its economic consequences continue to weigh. But there is also mounting market optimism that policymakers will respond with stimulus measures. Since World War II, there have been 26 corrections that averaged about 13.7% (almost exactly the current high/low correction), and lasted four months.  On average, all the loses were recouped over the subsequent four months. Volatility indexes flashed a once every few years “buy” signal late in the week last week.

And when?

We can’t tell you when things will turn or by how much, but our expectation is that bearing today’s risk and volatility will be compensated with positive expected equity returns. That’s been the lesson of past health crises, such as the Ebola, SARS, MERS and swine-flu outbreaks — all occurring during the past 15 years.  Historically, they were all significant bottoms in the markets. Also, history has shown no reliable way to identify a market peak or bottom. All of these beliefs argue against making financial allocation moves based on anxiety, fear or speculation, even as difficult and traumatic events transpire.  Quite the opposite, these shifts in allocation, if chosen to be made, are best made when things are calm, and one is feeling content.

Customized Investment and Retirement Plans

The team at Oak Harvest stands with our clients in developing customized and unique investment and retirement plans. We use many financial tools including public equities. Some of these are inherently volatile. But, when combined with other tools that do not have equity market exposure, these might be used to best meet your retirement goals as part of a total package.

Resources

Below, the team at Oak Harvest offers a few links for folks interested in market history after events like this, or in expert opinions on the virus itself.

Market Return Articles:

Volatility Articles:

Science-related Articles and Websites:

Also:

  • Check out these helpful podcasts by Chris Perras, CFA®, here.

 

Weekly market updates contain general information and expresses views of Oak Harvest Investment Services. Data, Articles, and information cited are believed to be reliable at the time of creation, but is not guaranteed. Content should not be regarded as personalized investment advice. Views and opinions expressed may change without notice and do not constitute a recommendation, or an offer or solicitation to buy or sell securities. In addition, Oak Harvest makes no assurance as to the accuracy of any forecast made. Past performance is not indicative of future results. Investing involves the risk of loss.