As we continue to press forward into what I have branded as “the year of uncertainty,” we continue to navigate markets in an environment of extremely high volatility. The volatility index, often referred to as the VIX, or the “fear index” is currently trading at around 30. During normal economic environments, when not dealing with a global health crisis, nationwide shutdowns of certain industries and weird executive orders being implemented on a unilateral basis, the VIX is perfectly happy trading around the 10-12 area. What this indicates is how much investors are willing to pay for protection of their portfolio.
Sophisticated investors and institutions will often use hedging strategies that involve buying insurance on their portfolios through the purchase of option contracts known as “puts.” This is an attempt to have some of their money going up in case the market starts a precipitous fall. When the VIX is trading consistently around the 30 area, this tells us that during any given day, we can expect to see between a 3-4% move in the broader equity indexes. That equates to about a possible 800 to 1,000-point move in the Dow Jones every day!
During our reviews with clients over the past couple of months, they have been very consistent in asking this one question: What is going to happen after the election? Concerns over who will win the election are very justified. Never in our recent history have we had a more polarized view of capitalism, wealth accumulation, and being rewarded for wealth creation than we have right now. I am here to tell you that at this point, in terms of the stock indexes, our prediction is that it does not matter who is elected. Our internal gauges tell us that whether President Trump maintains his position or Joe Biden wins, the outcome will be the same.
I know this may come as a surprise to staunch Trump supporters, but although this President is very pro-business, he has also been very pro-debt. We have moved from approximately 19 trillion in debt when Trump was elected to 26.5 trillion in debt.* With Nancy Pelosi’s $3 trillion economic relief package waiting in the wings to be passed, (which may include a vacation stimulus rebate of $8,000 for joint-filing families during a global pandemic lockdown), we could be at $30 trillion in debt by the end of 2021.
With this much money sloshing around, and government interceding on behalf of companies like Carnival Cruise Lines and Boeing to ensure their viability, it is our belief that a confused and volatile situation will continue to plague us for a while, no matter who wins the presidential election. Our own Federal Reserve chairman actually implied that “we have unlimited printing capabilities,” in reference to the ability to continue the bailouts needed to sustain the economy. In this environment, it is very difficult for investors to assess the true risks involved with investing.
This type of volatile situation will provide many opportunities for investors who are managing to invest from a position of strength. We believe that over the next four years, being nimble, humble, and managing the amount of risk your portfolio is exposed to will be the key to success and it isn’t going to matter at this point which color “pill” the U.S. decides to take. Our bed has and is still in the process of being made.
Remember, tough markets do not last … tough investors do.