As we continue to navigate uncharted territory with respect to the ongoing health crisis, market indicators like the VIX show that the level of volatility we are currently experiencing looks to persist throughout the year.
As discussed in the previous market update, sent on May 1st, when the VIX index is above 20, analysts consider the markets to be in turmoil. We can actually see how investment specialists feel about volatility by looking at something called a Futures contract. A Futures contract is a legally binding agreement to buy or sell a stock, share or commodity, at a distinct point in the future (source: Investopedia - Futures Contract). Therefore, looking at the price or value of a Futures contract gives insight into how the market views how the value of this stock, share or commodity will change going forward.
The VIX index closed at 27.98 on May 8th, showing that the markets are still in turmoil. However, looking at the value of long term Futures contracts for the VIX, shows that this level of volatility is likely to remain. In fact, the September 2020 value for the VIX futures contract was 30.85 as of Wednesday, indicating that analysts are actually predicting a slight increase in market volatility through at least September of this year (source: April Joyner - VIX futures point to coronavirus worries for months to come).
It is also important to note that there is a strong relationship between market returns and the VIX; with returns typically low or negative in times when the VIX remains elevated. The following compares the S&P 500 values with VIX values, showing this negative correlation.
With elevated volatility looking to persist, and the impact that increased volatility can have on your investments, it is especially important to ensure that your portfolio is optimally designed for this scenario. Diversification, which is an investment strategy we touched on in a previous update, remains the the best strategy to do so. Diversification is best achieved by ensuring your investments are spread across a variety of sectors, including various industries, geographic locations and also different markets, including equities and fixed income. Please note that by investing in mutual funds, your investments already have a layer of diversification built in, but it is in your best interest during this pandemic to ensure that you are diversifying your investments as much as possible while still sticking to your investment philosophy.
Although indications are that we can expect turbulent markets throughout most of 2020, it is important to recognize that the markets have done well over the last several weeks, with April being one of the best months on record. In fact, the TSX generated positive returns every day this week, and the DOW JONES and S&P 500 posted strong weekly results. The daily returns are found here:
Additionally, the overall returns for the week are found here:
|Market Index||Returns Week of March 30th|
|S&P 500 (US)||3.507%|
|Dow Jones (US)||2.56%|
Please let me know if you would like to have a call to discuss your investments and how well they are currently diversified or would like to talk about your investments in general.
Photo by Austin Distel on Unsplash