The markets are continuing to experience high volatility. During the past few weeks, markets have exhibited historic losses and gains. Such a short period measurement is not constructive to investment markets which are long-term forward-looking mechanisms. Yet, it is understandable that high volatility times can cause investor anxiety.
The widely recognized volatility index (VIX) has not seen current levels for quite some time. Interestingly, high VIX levels (above 35) tend to be followed by high positive returns over the following 12 months. This is due to the market action exceeding fundamentals (as in a panicked selloff), but ultimately rational minds prevail. It seems the current selloff is following historic norms of initial stages of irrationality.
The consternation comes from the unknown. In this case, the unknown of COVID-19. What is the infection real rate? How many will ultimately be captured in COVID-19’s grasp? How will the country restrictions, factory closing and social gathering limitations impact company earnings? (Focus on earnings because that is what the stock market is trying to ascertain in the end.) Only time will tell.
Investors are behaving as if businesses and the economy will come to a screeching halt. No doubt, there will be some impact, but a screeching halt is highly unlikely. We will likely experience some economic decline in the short term, but it is likely to be short lived. Once the COVID-19 infection rate dissipates, business will return to a more normalized state. In fact, China (where the virus originated from) has already seen lower infection rates and factories starting to ramp up activity.
We are monitoring the COVID-19 situation and impact closely. Patience, not panic, at this stage is paramount.
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