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08.20.2020 by David Robinson

VIX Suggests Stock Investors Not Unusually “Fearful”

US stock market investors are a resilient bunch. You might think that the combination of a serious pandemic and a hotly divided electorate on the eve of a historic election would raise investor anxiety to high levels. Subject to change on a moment’s notice in our fast-paced world, investors are nevertheless keeping their cool.

Investment professionals refer to the CBOE Volatility Index (i.e., “VIX”) as the “fear index” and a reasonable proxy for investor anxiety. Technically, VIX is derived from the pricing of S&P 500 Index options and represents the market's expectation of the 30-day forward-looking volatility. Investopedia A high VIX means that investors fear what lies ahead. A lower VIX, therefore, suggests relative investor calm.

As I write this, VIX is fluctuating between 21 and 22. On March 16th of this year, it peaked at 84.83. At its peak in the 2008-09 financial crisis, VIX registered as high at 89.53. Looking at a historical VIX chart, 20 appears typical although not necessarily average. CNBC So we are currently experiencing “normal” investor anxiety levels. Go figure.  

What is keeping investor anxiety levels in check? It is probably a mix of the following: The Fed’s massive monetary support for the economy; the prospect for an approved vaccine this fall; improved Covid-19 treatment protocols; low interest and inflation rates; some signs of economic recovery; and perhaps a dose of good old-fashioned US investor optimism.

Stimulus 2.0 Negotiations Have Broken Down:  Notice that I omitted the prospects of a Stimulus 2.0 fiscal package as a reason for the relatively calm investor state of mind. My optimism that we would have a negotiated package by now was clearly unfounded and perhaps a touch naive in retrospect. There are serious differences of opinion, including the desire by Congress to restore USPS funding cuts, initiated by the administration in part to discourage mail-in voting. I believe that there is a significant chance of no deal being reached now which would not be good for the markets, particularly if the economy begins backsliding materially. 

How This Recession Is Different: The linked article makes a strong case for how this recession has hurt US productively materially, whereas previous recessions did not impair underlying business and organizational productivity which facilitated bounce backs. While I do not disagree, I would point out that the pandemic has forced many organizations and individuals to learn new ways to get work and learning done which may lead to some offsetting productivity gains over a longer-term (also known as “Making lemonade out of lemons”). Axios

How the Pandemic Has Changed Us Already: My parents were children of the Great Depression which shaped their lives in major ways. How will the Pandemic shape the lives of my children and grandchildren? This article makes the case that some behavior changes will be permanent, including the health risks of group socializing. The Atlantic

The Advantages of Optimism: Above I referenced the possibility that old-fashioned optimism might be a factor in keeping US investor anxiety levels under control. Whether they are being realistic or not, optimists may have a leg up in certain life areas in that they are more likely to be motivated to try some activities. Is optimism a learned trait or basically hard-wired by genetics? Washington Post

A Quote I Like: If you hate a person, you are defeated by them. Confucius

Short Takes:

  • 20% of College Students Don’t Plan to Return in the Fall: Axios
  • How to Apply the Principles of Long-Term Investing to Everything: Pocket
  • Consumers Are Flocking to These Five Activities: NPD
  • Maine Craft Beer Ranks 4th Nationally: MaineBiz
  • The Secrets of Elite Athletes: Medium 

Feel free to send us feedback on any topic, suggestions for improvement, or to forward the notes on to anyone who might be interested.

As always, thank you for reading. Stay safe and be well. We look forward to hearing from you and seeing you in time.

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