Not Out Of The Woods Yet, Thankfully
The VIX index, which measures market volatility, spiked almost 50 percent yesterday, closing back above 40, showing that markets are still very much on edge. Reports of a surge in COVID-19 hospitalizations in Arizona and Texas, places ahead of much of the rest of the country in the re-opening, fueled fears that the economy will keep sputtering for many months to come. Dour comments about the medium-term health of the economy from Fed Chair Jay Powell, did not serve to buoy sentiment. The result was the market’s steepest decline since March.
This is all bullish, by the way.
No one has a crystal ball about how much the continued spread of COVID-19 will affect the economy as the nation strains to reopen. Political winds seem to have shifted largely in favor of proceeding with reopening broad swaths of the economy despite risks, citing civil unrest and long-term economic damage. Cases, hospitalizations, and deaths are sure to rise, but a society whose freedom stems directly from sustained economic activity cannot put itself on ice without eventually destroying itself—at least this is the case for reopening and it is getting much harder to counter.
Accordingly, volatility in the financial markets remains extremely elevated. Readings of the VIX above 40 are historically rare. I think it is crucial to remember that volatility should fall as the world begins to normalize. Whether this process takes months or even years, the markets historically rise as fear recedes—this is the absolute essence of what creates opportunity.
I believe a volatile market is an attractive market for a long-term investor. Current asset prices reflect fear in the marketplace. That fear is in the process of receding. Volatility could spike higher, sure, but that’s not a necessarily a reason not to remain bullish, because it seems highly likely that it is eventually going far lower.
The markets are not out of the woods yet. But that’s a good thing. I am reminded of a line from Robert Frost’s poem, Stopping By Woods On A Snowy Evening. The line is of course, “The woods are lovely dark and deep”. We need the woods. Investors need fear in the market. A healthy market climbs the wall of worry. That’s what this market is doing.
Any opinions are those of Burke Koonce and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Burke Koonce is a financial advisor at Raymond James & Associates, Inc., member New York Stock Exchange, member SIPC. www.raymondjames/burkekoonce