Volatility is creating huge opportunity, but how long will it last?

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  Volatility has become the new normal. This is not easy for many UK investors, but there are some who are taking full advantage of it. The market swings are likely to be unparalleled for those that first got into stock investing during the decade-long bull run. So far this year, the VIX volatility index has seen 19 sessions where it ended up at least 5%. This is the most since 1994. There have also been another 19 where it fell by at least 5%, the most since 2016. And this volatility has played out in the stock market. For some context, in recent weeks the Dow Jones Industrial Average moved as much in 30 trading days as it did in the previous 211. In other words, it took six weeks to move as far as it did in the prior 10 months. That does not even account for the massive swings that occurred within each day’s trading. Also, the first week of April saw the S&P 500 end 13 consecutive trading days of moving up or down by 1% or more. That was a longer streak than anything during the Global Financial Crisis and just shy of the 15 days we saw in October 2002 at the lows of that bear market. Contrast that with the steak the market ended earlier in the year – a period of more than 70 days when the market did not move by more than 1% in either direction. Bullish investors may also sight the recent gains. For the week leading up to Good Friday, the S&P 500 surged 12.1%. That was its biggest one-week gain since 1974, when it rallied more than 14%. The Nasdaq had its best week since 2009, jumping 10.6%. The Dow soared more than 12% for one of its biggest weekly gains on record. The market has shifted from complacency to anxiety and now irrationality. After the calm of 2019, UK and US investors need to get used to a new trading environment. As such, they should expect the wild times to continue. The bear market is likely just beginning and riding the wave of a perpetual upward trend, which generated easy stock returns for many and now appears to be a thing of the past. At least for now. The challenge is to accept that it may take months or even years to stabilise and revert to a long-term market trend. During such a period, rallies will often be used as excuses for selling. Because of that, investors may need to recognise that easy investment returns can no longer be guaranteed over short- and medium-term time frames. Again, this is not 2019. This means investors need to be more disciplined. It’s about applying risk management principles, knowing when to buy and sell, and having suitable asset allocation. Much of what worked over the past decade may well end up falling by the wayside for the foreseeable future. Signs of stabilisation in coronavirus infection in the US have been taken positively by the market, with some investors pointing positively to a slowdown in the death rate in New York. But this doesn’t indicate enough of resolution to warrant a longer-term bullish market view. Both President Trump and Prime Minister Johnson have used “war” as a metaphor for the battle against COVID-19. In that context, investors may need to see a definitive end point. A cessation in the conflict, if you will. That may well come down to medical science making a mark. Until there’s a vaccination commercially available and victory over the virus can be declared, it’s hard to expect the market to remain calm. This issue will continue to drive volatility. Also, there’s plenty of focus on the virus but less on the secondary effect of the lockdowns on the global economy. Economic data continues to look challenging. In the US, the latest round of coronavirus-induced layoffs and furloughs soared by another 6.6 million in the first week of April, bringing total job losses in less than a month to 16.8 million. Initial jobless claims, a rough proxy for job losses, have now posted increases of 6.6 million, 6.8 million and 3.3 million in the three weekly readings since the middle of March. For some perspective, the highest single weekly reading ever recorded before this period was 695,000 in 1982. And then there’s the tertiary effects of all the new government regulation that will come to manage a post-coronavirus world. So, any market rebound in this period of volatility shouldn’t be viewed as a return to what we experienced in recent years. It’s just as likely to be a temporary rebound. The fundamentals have changed. That said, the market is so unpredictable nobody knows for sure. This is an incredible once in a lifetime situation that we are all enduring in all aspects of our life and it’s anybody’s guess what might or might not happen in the weeks and months ahead. One thing is for sure however, whilst the panic and fear remain, the opportunities will also be there for those brave enough to take them.