The last week has been one of the most dramatic periods in stock market history. Many of our clients have asked us how we see the current turmoil playing out. No one can forecast the road forward with any kind of certainty. The range of potential outcomes is wide and once politicians and associated egos come into play; things get even tougher to handicap. With that being said, the markets are always speaking and there are internal signs that are worth paying attention to. There are three indicators we keep a close eye on to help us act: sentiment extremes, indiscriminate selling & capitulation in price action.
Sentiment looks extreme. The VIX (volatility index) shot north of $60 this morning (April 7th). This puts it in rarefied air with periods like 1962, 1987, 2000, 2008 & 2020. Forward returns from periods with this level of volatility have historically been very attractive. In addition, we have seen surging volume in inverse ETFs, which move opposite to their underlying indices. The put/call ratio, which is a measure of how much downside protection investors are buying has also surged during the last two trading days. Calls for an impending recession have also risen substantially since last Wednesday.
I want to be clear that we are not and will not be making any sort of call on a market bottom. What we do believe is that there is enough fear in the markets for us to start shifting out of relative safety (cash, money markets & Treasuries) into longer term assets. We have spent the last several years building up a large reservoir of short-term “opportunity money” and we aren’t going to let a good crisis go to waste.
There are a few additional things to keep in mind. First, when markets sell off as they have, there is usually at least one retest of the low. Even if something arrests this slide in the near term, it will probably take time for the pain that has occurred in the markets to fully heal. This is why we continue to be iterative in our approach. We want to give ourselves multiple swings rather than try and wait for some perfect moment to invest. It is also entirely plausible that we are in the early stages of a recession. Even so, markets bottom on bad news and generally, by the time a recession is determined, the bottom tends to be in the rear-view mirror.
The Hanson Slater Power Group
Baird
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Seattle WA 98104
206 664-8888
Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index. Robert W. Baird & Co. Incorporated