Today I want to accomplish three things…
- Again put in perspective just how crazy the volatility has been in the stock market over the past couple of weeks
- Explain why I think the worst of the volatility may be close to ending
- Provide my best guess as to when I think we could see the stock market bottom and then turn back higher.
We will get through this as investors. The key is to stay calm and think rationally.
Many Investors Are Going Through This for the First Time
I never expected to say this, but as an investor, I feel lucky to have gone through the 2000 to 2003 implosion of the tech bubble and the horror show of the 2008 global financial crisis.
I feel lucky because experience matters – especially in this kind of environment.
The global financial crisis was more than a decade ago. That means that there are 35-year-old investors, traders and even hedge fund managers who have never lived through this kind of volatility.
That gives us experienced folks an edge. You can’t train for this kind of action. You need to have felt it in real life.
After all, we’re in rare territory here. In less than a week, we have experienced three 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.
It isn’t fun, but hopefully it won’t be around much longer.
Why This Volatility Is Likely Nearing Its End
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, or more commonly, the “fear index.”
The VIX measures how much volatility futures traders are expecting in stocks over the next month. It basically is taking the temperature of investor emotions on a daily basis.
It is a complicated measure, but this is all you need to know…
- High VIX = frightened investors
- Low VIX = calm investors
You can guess what the VIX looks like today. Here is the view.
The VIX is reaching 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.
This is where experience helps us.
Experience tells us that when the VIX is spiking like this, investors are suddenly realizing the gravity of the situation.
This realization happens only once. Then reality sets in.
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.
Today, we are having our Lehman Brothers moment. We likely have a little while longer to live with the extreme volatility, and then it will subside.
The Signal That the Market Has Bottomed
Market volatility is likely to slow down fairly soon.
That doesn’t necessarily mean that the market is going to rebound immediately.
I think it is quite likely that the market will continue to drift down as scary headlines continue and the full hit to our economy is realized.
During the global financial crisis, the VIX peaked in October 2008, but the market didn’t bottom until five months later in March 2009. (I should mention that this five-month period was the best time to be buying stocks in my lifetime.)
I’m cautiously optimistic that we won’t have to wait quite that long for the bottom to come this time.
If we look to China for clues, 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.
I believe that is the key signal that the market here in the United States may be looking for. For everyone’s sake, I hope that is a data point that arrives as soon as possible.
If we follow China’s path, it could be as early as April.
Stay calm, stay safe.
We are all in this together.