The volatility in the stock market has been crazy over the past couple of weeks but the worst of the volatility may be close to ending.
Many Investors, especially young ones, might go through this for the first time. As a long-term investor, you have to get through this. The key is to stay calm and think rationally. We have gone through such periods already while the tech bubble imploded 2000-2003 and the 2008 global financial crisis.
In less than a week, we have experienced 3 of the biggest daily percentage declines in the history of the S&P 500. You can go decades without seeing this kind of volatility. Only the Great Depression, Black Monday in 1987 and the global financial crisis can compare to what has just transpired.
There is an official way that we can measure the volatility of the stock market or the overall mood of investors at any point in time. That measure is called the VIX. It is a market index most investors don’t pay attention to. Officially, the VIX is known as the CBOE Volatility Index. Some call it the “Fear Index”. The VIX measures how much volatility futures traders are expecting in stocks over the next month. It basically is trying to measure investor’s emotions on a daily basis. It is a complicated measure, but all you really need to know is the following:
1. High VIX = frightened investors
2. Low VIX = calm investors
You can imagine that the VIX stands at “total fear”. The VIX has reached levels we have literally never seen before. It has even exceeded the level from October 8, 2008, which was the moment the world found out that Lehman Brothers had failed and people believed the entire financial system was going down. But if you look back to 2008, you will see that while the VIX spike was severe, it didn’t last long. People came to terms with what was happening, and volatility receded. We might have to live a little bit longer with the extreme volatility, but then it will subside.
Market volatility is likely to slow down fairly soon. That doesn’t necessarily mean that the market is going to rebound immediately.
It is possible that the market will continue to drift down but the fear might go because investors come to terms with the ugly situation. As an example: During the global financial crisis, the VIX peaked in October 2008, but the market didn’t bottom until 5 months later in March 2009.
We might not have to wait that long for the bottom of the stock market. In China, we can see that the Chinese stock market turned higher when the number of new coronavirus cases started to decline. The Chinese stock market bottomed on nearly the exact same day that the number of new reported coronavirus cases peaked. That could be the key signal that the overall markets may be looking for.
Sven Franssen