Stock market’s fear gauge is hitting fresh highs days ahead of the election:
Wall Street’s favorite gauge of stock-market volatility rocketed to its highest level since mid-June on Wednesday as rising COVID-19 cases and renewed lockdown efforts spurred fears of a prolonged economic slowdown.
While record-high coronavirus case counts have fueled concerns about the pace of economic recovery, the prospect of timely fiscal support is all but exhausted.
Jeff Powell, CIO, Managing Partner & Founder of Polaris Wealth & Jeremy Witbeck, Partner at Polaris Wealth, discuss the recent volatility in the financial markets.
Welcome everyone to the Polaris podcast I have with me, Jeff. Jeff. Good morning. Good morning. How are you? I’m doing very well. So Jeff is our chief investment officer. And then of course, I am Jeremy, with Beck, one of the partners of the firm. Jeff, looking forward to our conversation today. Obviously, there’s been a lot of volatility in the markets as of recent. And here’s to see what your thoughts are regarding this volatility. What do you believe the causes?
Well, I mean, obviously, the the number one thing that we’re starting to see out there as volatility is is directly correlated to the VIX is what we’re talking about. Vi x is directly tied into what you see with market price move. And we’ve started to see a little bit of a sell off here in the market. So we had our markets peak back in early September, we had a tough September as an overall. But really, the markets kind of bottomed out towards the end of September and started to rebound some as talk of stimulus was coming into the the general public errors. And then, really, as we’ve gotten closer to the election, a lot of rhetoric going on there. And as we’ve started to see some serious things going on with regard to COVID. We’ve seen so often. So today, as an example, we’re starting to see volatility, and we’ll see where this the day ends. But we’ve got the volatility index up to almost 40. We that is higher than where it was back in September when we had our sell off. And if we were to close where we are right now, it would be higher than we’re just about the same levels that we saw back in June, when we saw a spike there. So really, obviously, we saw far greater volatility and the February March, dropping into April as we were recovering, but we’re starting to see a pickup in and volatility is a fear gauge. And so we’re starting to start to see a little bit more fear creeping into this market, which I think is understandable, given some of what’s going on.
Now, Jeff, and I know, we always talk about during elections, and especially leading up to the election, that volatility is to be expected, and it’s completely normal. Obviously, this year is anything but normal with a lot of things going on. Do you mind walking us through what’s been happening on the COVID? front? So I know that there was a big way that went through at the beginning of the year. And now it appears that there’s a lot more talk and chatter with regard to COVID. What are this? What are some of the trends that we’re seeing take place right now?
Yeah, I mean, I think that we’ve, we’ve talked about certain things before, also, we’re, we’ve discussed, hey, this is all about COVID. The recovery of our economy, really everything is driving as a driving factor behind that. But you just just let’s just start off with the United States. I mean, right now, we’ve had our daily new cases had all time highs. We had that happen a few days ago, our seven day moving average, is setting new highs. Thankfully, if we’re going to find some silver lining and all this, thankfully, what we are saying is hospitalization rates, they are starting to creep up which I think it’s starting to frighten people, but you are seeing our death rate remain low, at least for right now.
And is that attributable to just the advancements in treatment? Or do they know why the death rates been lower than what we experienced last go round?
Well, I think it’s a couple things. One is there is you know, we know how to treat it better. I mean, obviously, there’s no vaccine at this point, to truly either keep it out of somebody in the way of a polio or a flu vaccination. Or polio, more so than than a flu, but a flu at least would get your antibodies up to be able to find it off. But what you’re really looking at is not having a stampede going into hospitals. When people get really sick. Obviously, as we’ve already know, I’ve learned about being on ventilation systems is key. So when you overtax a hospital as a hospital, hospitals, the overall hospital system then you’re really running the risk of having death rates go up substantially. And that’s really one of the fears that’s out there right now. And I think that that’s where you’re starting to see a little bit of a pickup here with with volatility in the markets dropping off a little bit is that people are starting to fear. Okay, we’re starting to see our our rates going up to all record highs. Yes, a lot of what’s going on is hitting Younger people today versus having people that were more risk, which is also part of the attribution of why we’ve seen less of a death rate. But what the scary part is, is that there was a prediction that we would have a spike and rates come winner. Last time I checked around fall. This is seeming to be coming very quickly and an almost at an exponential rate. So I think a lot of people are very fearful that this is going to get out of control again, very quickly. And if it were to get out of control, the only way that we have to combat it, again, is by shutting down parts of our economy. So I think that there’s some fear that you’ll see a reversion of some of the steps that we’ve been making in the way of progress to get back on our feet again.
Yeah, that’s actually very interesting. It’s it feels a little bit like the tale of two cities where on the one hand, just a couple of weeks ago, I was reading headlines that they were expecting record earnings for a lot of companies as we go into the holiday sells, and certainly a lot of optimism, maybe even a little bit of euphoria, and that the summer was a vast improvement over what we experienced in February and March. And now, on the other side, we’re seeing a lot of fear escalate, because we haven’t been able to control this. And it’s not just localized to the US, but it appears the world really having a hard time keeping this under wraps. You might getting some thoughts as to kind of how those two different pieces are pulling the market in different directions. And really, what is driving the market right now? Is it more fundamentally driven? Is it technically driven sentiment driven?
Well, it’s it’s really sentiment in tech. And basically, what you’re talking about, I mean, again, just trying to process a little bit of the overall discussion point, because you really kind of hit on on several things that are worth talking about, you are seeing a huge spike going on in Europe right now. So really kind of as we interweave these things together, it’s it’s kind of an interesting and challenging way of kind of navigating it. You know, technical evaluations are driven by other things, typically that they can either be macroeconomics or fundamentals, they can be sentiment driven. And really what we’ve got right now is, is sentiment driving everything. And the best way of reading that is by looking at technical evaluations. But we’re starting to see things abroad, that can very easily be kind of a precursor to what we’re seeing here, where you’re saying, shutdowns in Italy. You’ve got cases in Europe that are at their highest rates, period. We do too. But again, it seems to be hitting Europe a little bit faster and harder and earlier than we are. And the fear that I have is again, you know, as you started looking at weather reports, and as things get colder, again, how do people dine outside, you know, that was part of what has helped the restaurant world recover. And while we’re both sitting here in California and 70 degree weather, it’s not the case in most other places in the country. I was talking to family in Chicago, it’s already started in Stowe, they’re talking to family in New York, it’s been ugly, not quite snow yet. But when you’re talking about 40s and raining, that’s not sitting outside, even if you have some sort of covering that’s not dining outside kind of weather. So as we start seeing some of the service industry that really was reliant upon good spring and summer weather to be able to, to really take advantage of and kind of spread their wings, so to speak, a lot of that is going to be clipped. And I think that we’re going to start to see a little bit of a reversion to what’s going on there.
Gotcha. Well, and Jeff, then based on that knowledge, that information, I’m curious, then what are your thoughts with regard to portfolio constructions can take this in different direction? Although I think it’s a it’s a great one for our audience. What should they be thinking about with regard to making tactical sets?
Well, we we already started to make them ourselves. Yesterday, I was having this this exact discussion within our investment team, which is, you know, where do we where do we pull back where we where do we start to start placing money. There are some areas that are looking better than others. Again, the work from home and play from home, the themes continue to be good and continue to be strong. On the flip side, and we got out of our exposure to some of the dining companies and suppliers and so on where you’re gonna, I think, start to see a little bit reversion within the entertainment world, so to speak again, specifically within live entertainment not, you know, I think that you’re going to continue to see certain things like Netflix and other work from home and play from home, things continue to do fine. But you know, it’s, we’re going to start being sequestering and sheltering at home again. And with not much to do other than to stare at each other. So if you want to be actually entertained, unless your spouse is really entertaining, you will be looking to things like like Netflix and Hulu and gaming and other things for for that entertainment. Other things that we’re also looking at within it is how long this lasts. And there that is really a huge contributing factor. And so once the election is behind us, if we do see stimulus, that could be something that would stop a pullback in the marketplace. If there is further advancement of a vaccination of any kind, then we would probably see, the market starts to rally off of those things. There are doctors that I talked to, that are in the field that are very optimistic that we might have something by the end of the year, I talked to others, and they they’re talking about end of next year. And so you’re getting this huge spectrum, which I think, again, is adding to the volatility where you’ve got this optimism on the short end. And not that I would say it’s pessimistic, but I think most of us are pretty tired of what we’ve already dealt with, or are getting a little bit of battle fatigue of what’s happening. And I think that’s also leading to a little bit of the increase in COVID is that people are getting to a point where like, well forget it, if I get it, I get it. And well, that is a way of viewing it, it’s a very dangerous way of looking at it. And obviously, with the ability to spread and this thing being as contagious as it is, my fear is that we continue to see an expansion of what we’re dealing with with COVID. And we see another really kind of taxing on our hospital system, a second wave there, which I think would be you know, where you’d start to see death rates go up. And I mean, there is fear of it going up as high as 2000 people there, which is where we were when we didn’t know anything about this and we didn’t have you know, people backfilling some of the needs of the hospital system with ventilation systems and so on.
Yeah. And, Jeff, during that you actually touched on the stimulus that took place in February and March and through April and May that really helped to not only inject money into the economy that also helped cause the markets to rally and start to dramatically improve even though we were out of the woods yet. I’m curious to hear your thoughts regarding this go around? And does it look like we’re going to get another type of package? Does it look like it’s going to wait until after the election? And if so what would the expectation be then on the markets if we don’t get something until after the election?
Yeah, it’s very interesting. Unfortunately, right now I see the stimulus is almost a political card that is being played by both sides. Again, going back to how agnostic, we must be as a portfolio management firm, when looking at these types of things, but they they’re holding both parties, they’re holding people’s lives in their hands by holding back on doing stimulus, when you kind of look back to what went on. I mean, and again, our economy has shrunk at a level that we’ve not seen since World War Two. And really, we’re not through this thing yet. So it’s very possible that will surpass that and will be at a level that we haven’t seen since the Great Depression. And, you know, I know that neither one of us were alive and breathing at that point. But we all we are both students of history, and you’ve seen the lines where you had people on soup, kitchen lines, you had people that were sleeping on the streets and, and public housing and so on. That’s what the stimulus is actually prohibited. So if you really want to have a shock to the system, you don’t do it. And then people are kicked out of their homes, and they need government assistance. And then it hits the financial system, because they’re losing money because they have no way of being able to pay for mortgages and rent and other things of that nature. It would just be a massive domino effect. So while this is definitely taxing our government’s abilities to raise rates in the future, and we’re going into further and further debt as a country, it’s the lesser of evils. And so looking at an X package, it’s it’s a second wave of what’s needed. Unfortunately, I don’t necessarily want to pay people an additional $600 on top of unemployment where you had if this statistic was correct seven 4% of the people that were on unemployment were actually making more money being unemployed when that than they were working. Obviously, we don’t want that side of it. But on the other side, we also don’t want people starving to death. So somewhere in the middle, where we can make sure that people aren’t kicked out of their homes, kids aren’t sleeping on the street. So that when we do have a vaccine to this, that the economy can pick back up and and quickly get onto its feet rather than having a massive paradigm shift, where the banking system gets rocked. Obviously, the restaurant industry would be completely rocked, it would have ill effect on really almost every part of our economy if we weren’t to step in and prop it up in the situation. So it’s, it’s not even an option. But predicting when it will come, may we’re a week away from a day of action. Every once in a while you’ll you’ll hear a little toggling back and forth with both parties that they’re going to try to get something together. I personally think it doesn’t happen until after the election. And then you know, whoever wins the election will be the savior swooping in to get this thing done.
That’s it. Gotcha. Well, it’ll be interesting to watch to see how that plays out. I’m just, I guess any last comments or thoughts as to how, as individuals, we can try to prevent or at least reduce the severity of the the winter outbreak?
Yeah, I mean, I think that well, first and foremost, I mean, be smart. Be smart, be safe with yourself. I mean, we did send up my stall view. So if you haven’t gotten a mask, and you want one, please reach out. It might have been taken by your mailman, who liked our mask. But But first and foremost, I mean, you need to be smart about it. Polaris continues to be smart about it, we, every once while we’re getting asked for in person meetings, which we are not doing, we’re not going to subject you or us to the possibility of having being subjected to the possibility of having COVID. But beyond that, I mean, when it comes to like your financial health, we are going to be very nimble with what’s going on with your portfolios. I mean, within our equity portfolios, we already have approximately a 15% buffer built in right now have cashed compared to where we would be normally versus our benchmarks. We will be looking at this and making decisions on do we want to take it down further.
So you need to be
flexible, I guess, is one way of saying it. But you need to be very agile to how you’re managing your money and the circumstances. And as we’ve discussed before, I mean, it’s not about being right, it’s about being right at the right time. And it’s not about being arrogant about it, we’d rather be partially right and completely wrong. So let’s not be completely wrong with what’s happening. I mean, let’s hope that the that we do find a vaccine when we do see one and when that one stimulus does come in, I think you’d probably see a nice rally off of that. each one individually as a deal changer. But before then, I mean, obviously, again, we’re starting to see this pretty severe spike in COVID. The risk of having our economy shut back down, it’s out there. You’re seeing it in Italy, you’re seeing it and other places in Europe. I just hope that we don’t have to go through the same thing ourselves. And the only way that we don’t is by actually being vigilant and being patient with what we’re dealing with as a society.
Well, we’ll set Jeff and really appreciate your perspective on that. And as always, thank you so much for your time really enjoyed the conversation.
I guess we could we can turn
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