After Another Black Monday
This is the business we’ve chosen.
We just experienced one of the three biggest volatility spikes on record.
We saw similar moves for the CBOE Volatility Index $VIX in 2008, amid the Global Financial Crisis, and again in 2020, when COVID-19 hit hard.
This one was caused by the Bank of Japan raising its benchmark interest rate by 25 basis points.
We also just experienced the biggest volatility plunge in recorded history.
Signs of support started to emerge pretty early on Monday, even when the Dow Jones Industrial Average was on its way down 1,000 points, as Mish Schneider notes in her Weekly Market Outlook.
Tuesday’s follow-through is encouraging for people like me, a committed member of the up-and-to-the-right club.
But some factors that contributed to that three-day crash are still present, like thin summer volume and the general seasonal trend, the ever-evolving earnings environment and questions of valuation.
And the VIX is still above 27, well up from its extended sojourn in the low teens.
Inflation may be over. But there’s a new bogeyman for markets. It’s called growth.
Even a thing like a BoJ rate hike is foreseeable in the present context.
Japan’s central bankers are moving up from below the zero-bound following two decades of stagnation as the Federal Reserve, et al, are easing back after taming inflation.
But the US nonfarm payroll data was soft. And Buffett sold some Apple $AAPL.
And the Fed is late again.
“Yada, yada, yada” is how kids who graduated high school in 1989 might put it.
But, still, investors, traders, and speculators are going to make their buy-hold-sell decisions in their own time, and often enough it aggregates in ominous ways.
And it’s easy to get carried away with the drama.
The VIX data only go back to 1990. But there is a lot of history in those 34 years.
That’s more than a third of a century, and just in the back half of that time frame here we’ve had two hundred-year events, the Great Recession and a global pandemic.
That’s not to minimize the confluence that overwhelmed investors, traders, and speculators early in August.
These things happen, often, and this one was super-steep though not necessarily that deep. Something like it will happen again.
We can do ourselves and our portfolios a favor by paying attention to Mish when she highlights the importance of things like the iShares 20+ Year Treasury Bond ETF $TLT and the iShares Transportation Average ETF $IYT.
Those prices – along with the rest of Mish’s Economic Modern Family – aggregate a lot of information.
Almost everybody fears recession right now. Almost everybody always fears a slowdown in economic activity.
It’s a question of what’s reasonable. Sometimes people lose sight of it – their reasonability, that is.
And volatility is the price we pay for the wealth creating effects of that long-term up-and-to-the-right trend.
Michael Batnick of Ritholtz Wealth Management summarized events well on Monday.
“I don’t know when the selling stops or what this means in the long term,” Batnick wrote, “but I do know that this too shall pass. There are always reasons to sell.”
