Blue HavenBondsMarket Outlook

3 reasons to stay optimistic

By March 13, 2022 No Comments

Nassim Taleb has a famous quote that comes to mind with regards to the current market:

“To bankrupt a fool, give him information.”

Assuming we know how markets will respond to a given piece of information is a dangerous game. Consider what you would have predicted for the stock market in 2020 if in December 2019 you knew a global pandemic was about to shut down the economy three months later? Well, the S&P 500 rose 16% in 2020. Next, flashback to October 1963… someone tells you the President of the United States is going to be assassinated in one month… surely the market will crash then! Surprisingly, stocks rallied shortly after JFK’s death and went on to return 13% in 1964.

We never know what the future holds, so even though there’s no shortage of negative information right now, here’s three reasons to stay optimistic.

Stocks have done well following rough patches

The S&P 500 is down more than 10% through March 10th for just the eighth time in its history. Six of the last seven times that has happened, the S&P 500 performed very well through the rest of year, rising a median of 30%! The only negative occurrence was in 2008:

In addition, the NASDAQ made headlines recently as it officially entered a “bear market,” defined as a drop of 20% or more. Ironically, the NASDAQ has performed very well on three, six, and twelve month timeframes following the official start of a bear market. Often times, by the time the bear market officially begins, the worst of it is over!

Volatility may have peaked

Another reason for optimism is that volatility, as measured by the VIX index, may have peaked. The VIX index represents the market’s expectation of volatility over the next 30-days. The VIX is an index that anyone can keep tabs on, just like the S&P 500. Currently, it is around 31.

A high or low VIX means the market expects high or low volatility over the next 30 days. But what constitutes high or low for the VIX index? It can be subjective, but one popular notion is that a “high” VIX is anything over 20 and a “low” VIX is anything under 12. Anything between 12-20 is considered “normal.” In a high VIX environment, the S&P 500 will experience greater percentage changes on a daily basis. In a low VIX environment the S&P 500 will experience smaller percentage changes on a daily basis.

The VIX has been above 20 every day since January 18th, 2022. Since that day, the S&P 500 has fallen roughly 10%. Markets tend to fall as volatility rises and rally as volatility declines. The good news is that even though the S&P 500 is near its low for the year, the VIX is a good bit away from its January 24th high near 39.

Think of a toddler trying to recover from a temper tantrum, the first step is to calm down. Granted, the VIX is still high, but with it being lower now compared to January 24th, even with the market still declining, it’s a sign that the market is at least “calming down.”

Jobs data is still positive

Last month the unemployment rate fell to a new post-Covid low of 3.8%. This was a decline from 4.0% in January and below the prior post-Covid low of 3.9% in December 2021. This is important because the unemployment rate has flat lined or ticked higher before every single recession dating back to 1948.

In addition, the total number of job openings remain near record levels, indicating there is a lot of demand for labor in the jobs market. The total number of job openings peaked 8 and 15 months before recessions that began in December 2007 and February 2020, respectively. The latest data we have shows 11.3 million jobs open as of the end of January (a slight downtick versus December 2021 levels of 11.4 million).

We know the information

We know there is a terrible war going on in Ukraine right now. We know inflation is at 40 year highs. We know Americans are paying more for gas than ever before. We also know that there’s certainly things we don’t know! And even if we had access to that unknown information, it wouldn’t necessarily help us predict how stocks will perform.

Yet, with a decline of 12% so far to start the year, there’s a chance that many of the negatives (known or unknown) have already been priced in to the market, and we’ll choose optimism over pessimism any day of the week!

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