What a difference a year makes.
On March 16, 2020, I wrote the following in a post entitled “When All News is Bad News”…
“The Volatility Index (VIX), also known as the “fear index,” ended today at 82.69. Since its inception in 1990 it has never had a higher close...
When all news is bad news it can seem as if it will be that way forever. But it won’t. Betting against human grit and ingenuity in the long-run has always been a bad bet in the past and this time is no different.
That’s true in life and in investing.
It will get worse before it gets better but this, too, shall pass. We’re going to beat this thing and come out stronger than before. Better days are ahead.”
This is what a chart of the Volatility Index ($VIX) looked like that day…
And this is the path it has taken since…
Calling this the most dramatic one-year turnaround in market history would be a gross understatement.
In the last 365 days we’ve moved from…
- Forecasts of a second Great Depression to calls for a growth expansion for the ages.
- Worries about markets completely freezing up to a record-setting boom in corporate bond issuance, IPOs and SPACs.
- Investor panic with fears of losing everything to investor euphoria with fears of missing out on the next parabolic asset move, of which there seem to be new ones every single day.
Today, we have…
- Not 1, not 2, but 3 highly effective and safe vaccines approved in the US and being given to more than 2 million Americans every single day.
- Covid-19 numbers that have declined dramatically from their peaks in January, with the declines expected to continue as we approach herd immunity by the summer.
- A third round of stimulus checks, the largest yet ($1,400 per person), being send out to over one hundred million Americans who will see their collective incomes surge to another record high. This in turn, is expected to push retail sales to another stratosphere, with record S&P 500 earnings to soon follow.
- An economy that is expected to post its strongest year of GDP growth since the early 1980s with the Unemployment Rate moving right back down as the reopening of America takes hold.
- A Federal Reserve committed to easy money policies for years to come and a Federal Government committed to additional borrowing and spending (ex: infrastructure) to further simulate the economy.
In short: everything is awesome or will be quite soon. We should all be grateful for that and take some time to stop and smell the roses, especially after the harrowing year we’ve just experienced. But the natural byproduct of all that awesomeness is a dearth of compelling opportunities for investors. For when all news is good news, abundant optimism tends to push prices up to levels where the risk/reward becomes markedly less favorable (bond yields are quite low and equity valuations are quite high). That’s the tradeoff – and as long as markets are driven by sentiment and human emotion, it will always be that way.
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