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Fear Gauge Goes Full Blown Epic

CAMS Weekly View from the Corner – Week ending 3/13/2020

March 16, 2020

Market participants have proven in recent days that historically highly valued markets and complete unknown forward looking economic growth do not get along well at all.

The above invites the logical follow-on of collective fear as participants scramble to adjust prices to levels that they feel would be reasonable as they look forward.

The obvious problem in this process – and clearly displayed in the volatility of said pricing adjustments – is the inability to draw upon historical references for this unknown to assist in achieving some stability – near term at least.

Underlining this questionable forward economic landscape is the unknown of end demand.

The U.S. central bank, known as the Federal Reserve, can print money and lower interest rates in an attempt to stabilize the financial system but these measures have limits relative to incentivizing end consumer demand as well as stemming supply-chain disruptions when the masses are uncertain of the ultimate depth of the Coronavirus (COVID-19 as we now know it) impact on societal interactions.

What we can measure are collective market participants fear levels relative to history.  This type of observation, relative to markets, helps gauge if these participants have gone to literal historical extremes with their fears in light of the unknown.

$VIX - 1.31.20

On February 3rd’s Weekly View we shared the above chart of the S&P 500 Volatility Index known in slang as the Fear Gauge.  At that time we offered concerns were increasing within markets as the above gauge was showing signs of oncoming volatility.

For perspective, we have extracted that chart from said View to get a sense of where we have come from within six short weeks.  To compare then to now, below we show the same Fear Gauge in a longer view of 13 years.

$VIX - 3.13.20

Above the blue circle denotes the extreme fear levels attained in the deepest part of the market rout back in 2008’s Great Recession.  To the far right we see the blue arrow denotes our current experience.

The velocity of our current fear exceeds that of 2008 when factoring in the level from which we began just a few weeks ago.  In 2008 the build was more gradual with a then sudden rush of fear while this experience has been a near immediate rocket ride up with little build time.

The point of this overall observation is perhaps market participants have gone too far too fast with their fear relative to the unknown backdrop economically speaking.

This is not to say we have clear skies from here relative to stock market performance but rather that in an extremely short period of time we have gone to historic levels of fear.  With this, a reprieve of this fear may be in the offing near-term as participants re-calibrate.

We will continue to observe market behavior closely as we glean messages from the collective participants as to where this all may be heading next.  Will this turn out to be a short term episode or will it be the beginning of a longer term downside market where stocks struggle for several months rather than a few short weeks?  This is the central observation point at this time.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio


H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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