Market fear ratcheted up quickly when the coronavirus hit the US. It certainly took us by surprise, though we had been warned by experts for decades that a global pandemic wasn’t a matter of “if”, it was a matter of “when.” Not only was our country hit hard, we were ill-prepared for the societal and economic upheaval.
If we had a rapid response plan in place, perhaps the number of infections and deaths could have been mitigated. Perhaps the economy wouldn’t have been pummeled. It’s all speculation at this point. In reality, fear skyrocketed and our emotional attachment to stocks disappeared overnight.
Market fear subsides though uncertainty remains
Thankfully, there has been some good news here and there. Vaccine testing is underway. Abbott’s test kits appear to be reliable. Social distancing is working well. As a result, market fear has subsided and the VIX has fallen sharply.
However, Q1 earnings are just around the corner. Based on results and guidance, market fear could crank back up again.
Another possible wrench in the markets? A new “normal” economy will likely take a while to form. Yes, central banks around the world are doing what they can to soften the blow. The global economy is so damaged that it could take a year or two to recover.
And then there’s the presidential election in November. Volatility will likely increase as uncertainty rises (as it did in 2016).
Before giving up on the US economy, remember that it has recovered from some very dark moments in the past. Some of its biggest and best gains have been the silver lining surrounding dark clouds. This time should be no different.
The markets have enjoyed a strong run over the past two weeks. Stay on guard, hold onto a lot of cash and keep index puts as protection (because the VIX is lower, they are cheaper right now). Trading opportunities will appear as always.
