After two months of heightened volatility in the markets, some form of stability appears to have returned. Since the markets ‘bottomed’ out on 23rd March we’ve seen a steady rise with the S&P 500 climbing 25%, presenting its most substantial bear market rally in 90 years, which, barring a considerable sell-off next week should see it be the strongest monthly performance since October 2011.
One thing I like to keep an eye on is the VIX Volatility Index. The VIX gives an insight into market volatility and represents the expectations of the market for the coming 30 days. Simply put, the lower the VIX, the lower the expected volatility. VIX peaked at 82.69 on 16th March; it has consistently dropped since, closing yesterday at 35.93. However, this is still considerably higher than the high teens it averaged for the previous 12 months up to February.
While this has been encouraging April has been anything but smooth with 57% of the days seeing positive gains. We have continued to see some volatility with oil WTI US Oil briefly dropping to -$40 a barrel, something never seen before as traders tried desperately to offload May’s futures contracts. Many believed this would transfer to us seeing a significant sell-off in equity markets. However, markets shrugged off the news with the S&P and FTSE finishing the week flat and oil majors Shell, BP & Exxon finishing the week up on the previous Fridays close.
It’s important to remember that in an efficient market, share prices are a reflection on the future profits and risk of those future profits. This means that barring an unexpected market event such as the financial crisis, 9/11 or Covid-19, which by nature are difficult to predict, the news is largely irrelevant and uncorrelated to stock market performance. On the other hand, the news is backwards-looking, often by weeks or months, meaning in most cases this has already been priced in.
This was perfectly demonstrated on Thursday when the US announced huge jobless claims of 26 million, yet the S&P barely skipped a beat. That’s not to say news cannot have an effect if reports are better than expected or indeed worse than expected this can have short term effects on the price. However, for long term investors, these small bumps in the road should not affect your overall performance and demonstrate perfectly how riding out the volatility, trusting your plan and sticking to it will win out in the end.
As governments appear to have some degree of control of the virus and its spread, talk has turned to when and how countries will ease their lockdowns. Whilst this is a scary prospect for many and it is essential people remain cautious, taking all necessary precautions, this is also an important step to get the world moving again and economies back on track. I think it’s widely expected this will be done in phases and social distancing will be in play for many months to minimise the possibility of a second wave. Providing this is managed correctly we should continue to see markets continue to recover as confidence grows steadily and the government’s stimulus packages filter through to where it’s needed most.