Worst weeks on record

14 March 2020

Dear Fellow Investor,

This is a quick update to say that we’ve just had one of the worst weeks on record and I’ll share a few thoughts.

The difference between a crash and a bear market is that a crash happens quickly, whereas bear markets are drawn out. Yesterday, the VIX (market fear) rose above 80, which is comparable with the 1987 crash and the credit crisis in 2008. Given the enormous swing between bonds and equities, in my opinion, the 1987 crash is the nearest comparable.

5-year chart of the VIX. The VIX is the fear index. The higher the VIX the higher the fear. It is at the highest level since 1987. Every time it has reached these levels the market recovers.

The VIX moved to historical highs

Source: Bloomberg – CBOE VIX Index 

I said the VIX had spiked to buy the dip level last week. Unfortunately, I recommended a modest trade to buy that dip.  Not my finest hour, but I’m confident we’ll be back on track soon.

This week’s crash followed that downward move. In other words, the previous market falls triggered a round of panic selling, presumably a liquidation of some kind that we haven’t yet heard about.
In 1987/ 2002/ 2008 and 2015/2018 the VIX spike marked the low

In any event, I want to remind you of events in 1987. The market fell a bit, rallied, paused and then fell a lot. It took two years to make a new high, and the lowest day was the panic day – equivalent to yesterday (Thursday). Looking at the event today, the fall is comparable as is the VIX spike.

I suspect that the shock is done and equities are rallying hard today, which is reassuring, but there will be aftershocks. So far Justin Trudeau’s wife, Tom Hanks and Brazilian President Jair Bolsonaro have caught the virus. We should expect much more of that as the bad news hits home. The key will be whether the market has accepted that and manages to shrug off virus-related news.
Gold held up right until the end, before falling yesterday. Despite owning gold, I see that as good news because it means all assets have reacted and it is further evidence that we have seen the worst. For the market to collapse from here, we would need to see something terrible happen that we haven’t already thought about – ie, not a virus story or related economic weakness due to the lock down.

I will not make a recommendation today, despite the temptation. Best to let things settle down and see the long-term structural changes begin. Market shocks of this magnitude always lead to significant changes. Perhaps we travel and socialize less, not just next month but permanently. Supply chains will change, and perhaps we won’t embrace cities in quite the same way. It will be fascinating exploring these new trends.

Today’s rally is very welcome and I’ll write a longer update next Saturday. Have a good weekend, try not to worry and stay safe.

Invest well and grow your wealth
Bill

Critter today is a special cat.

“When I first saw him, he immediately stole my heart. His wrinkled pink skin, as fine as a peach, and his turquoise eyes, I was in love!" said Sandra.