They thought it was all over – but the worst was yet to come….

Thursday, 14th May 2020

They thought it was all over – but the worst was yet to come….

Thanks to the CBOE Volatility Index (VIX) we know exactly when investor fears about the global pandemic peaked ….

It was Monday 16th March. The VIX reading climbed to 82.69….

Some people call VIX the Fear Index. Others call it the Complacency Index. In truth, it’s both….

It measures how volatile investors expect the S&P 500 to be across 30-days….

A high measurement says investors are fearful. A low reading says tomorrow will be just like today….

‘Fear’ doesn’t quite capture a VIX reading of 82.69. Abject terror is more accurate….

The VIX reading had never been so high. Not once in 30-years….

  • A funny thing….

The funny thing is that on Friday 10th March, the US stock market enjoyed its best day since 2008….

The S&P 500 closed 9% up. The Dow Jones was up 9.36%. That represented a gain of 1,985 points – the biggest ever….

But, while champagne corks popped on Wall Street, European investors wept into their ale….

Earlier that day, European markets closed after their worst week since 2008….

The FTSE 100 had shed 17% of its value – £275 billion wiped from the boards….

The Stoxx 600 lost 18%. Germany’s DAX lost 20%. Italy’s FTSE MIB was down an astonishing 23.3%….

In America, they smoked cigars and slapped backs. In Europe, investors surveyed the carnage….

  • Different strokes….

The Atlantic is a vast body of water. But why such different fortunes either side of it – one made, the other lost?

Simple! On Friday 10th March, after weeks of ignoring COVID-19 or downplaying its severity, President Donald Trump declared a national emergency….

As you know, there’s nothing that gooses-up the appetite for stock-market investing quite like a national emergency in which thousands of lives are sure to be lost….

Especially when the president promises to release $50 billion in federal aid and to ‘unleash the full power of the federal government’ to fight the virus. Whoa!

Looking every American stock market investor in the eye, Trump made his intentions clear: ‘No nation is more prepared or more equipped to face down this crisis, as you know we are rated number one in the world….’

Investors heard Trump loud and clear. This virus was getting stomped. No expense spared. No amount of government spending too much. U-S-A!! U-S-A!!

Trump couldn’t have been clearer had he stood up and yelled ‘Buy!’ But he didn’t need to. Investors were piling in before he’d even signed off….

  • Monday morning….

I don’t know what happened that weekend, but by Monday the American mood had soured….

News from China didn’t help. Year-on-year retail sales were down 20%. Industrial output had fallen 13.5% – the worst figures since 1990….

It offered a grim portent of what the US might have in store….

European markets remained in freefall…. Then the price of oil dropped 10%….

The Federal Reserve announced interest rates would be cut to near zero. But it was too late. Stocks on Wall Street were falling like stones….

So much so, that trading on Wall Street was suspended that Monday. A wave of selling saw the S&P 500 drop 8% and the Dow Jones lose 9%….

Friday’s gains had been wiped out at a stroke. And  the Fear Index was riding at an all-time high….

  • Confusion in, confusion out….

March 13th was the ‘best day on Wall Street since 2008’ but it probably shouldn’t have been….

Investors reacted to breaking information – Trump’s speech – and took a view on what it meant and where it would lead. They allocated capital accordingly – and markets boomed….

It wasn’t until the Monday that the market revised its view of where things were headed….

New information suggested different potential outcomes. The market realized it would take more than Federal money and jingoistic chest-thumping to beat a deadly virus….

Markets don’t always make sense. And it is wrong-headed to expect them to. After all, what is a market but a mechanism that enables people to express what they believe via the allocation of capital….

Sometimes – quite often in my experience – people make little or no sense. What they believe frequently defies explanation or understanding….

And if enough people are confused…. if enough people are wrong…. if enough people hold silly beliefs…. what choice do market prices have but to act as a mirror and reflect?

  • Stronger than ever?

I wonder how much confusion is in the markets now….

Stocks in the US, the UK, Europe and Japan are up off their COVID-19 bottoms. The VIX reading is back down around the 30 mark – hardly an indicator of complacency, but a clear sign that max-fear has subsided….

There’s a lot of talk from the likes of Trump, Boris Johnson, central bankers, academics, economists, commentators and miscellaneous pundits – the ‘influence’ brigade….

They say we’re over the worst…. we won’t see such lows again…. the economy (global and local) will bounce back aggressively and be stronger than ever once things get moving – a rapid ‘V’ shaped recovery….

But are we? Can we be so sure?  Will it  really? Isn’t this just wishful thinking? We’re clearly headed for the mother of all recessions….

How many shuttered businesses will never again open for trade?

How many furloughed workers will find themselves permanently out of work?

How many sub-contracted workers cleared from the books ‘until things pick up again’ will discover things don’t pick up enough….

More than is forecast – in all three cases. That’s my best guess….

And how will consumers behave when things get going again?

Will they go at it gung-ho – packing out shopping centers, pubs, restaurants, planes, concert halls, cinemas and sporting stadiums like the virus has taken a permanent vacation?

Or will they approach things with caution – hedging their bets, seeing how things pan out, choosing not to spend what they might not have on things they have discovered during lockdown that they don’t really need?

  • Back to 1929….

The economy won’t come storming back to life – creating a perfect ‘V’ chart – on the starting pistol’s command….

Instead, it will be slow going. It will likely get worse before it gets better. And markets might not be as confident then as they are now….

When people talk about the Great Depression, it is the market crash of 1929 that always gets most attention….

People forget – or don’t know – that the stock market continued to fall for three more years after that until finally hitting bottom in 1932….

It was that three-year period after the initial crash in 1929 that wiped out most stock market investors and caused most financial misery….

The markets today look a bit like they did in 1929 and 1930 – with stocks rallying after the crash. Back then, investors thought the worst was over. They got it wrong. The worst was yet to come….

Is that how it will be this time too? I don’t know. All I can tell you for sure is that I wouldn’t want to be fully invested in stocks right now….

That’s how it looks from here….

All the best

Dave Gibson

Money Truths