Financial markets are in a period of panic. Unfortunately, this is the part of the game. We’ve seen it before and survived it and we will get through this too. Last week the volatility index increased by 109%, which was the 3rd biggest weekly spike ever. Including dividends, the S&P 500 is now down 13.4% YTD. To put this into context, I looked at a good chunk of our accounts after Thursday’s selloff, and they were actually positive on the year. With volatility spiking, we will take short-term mark to market losses on some of our options, but ultimately, we feel great about these positions ending up nicely profitable. Many of our best investments historically have emerged from these types of periods of panic and fear. The 10-year Treasury bond rallying is reducing interest rates, which is very good for our real estate and fixed income investments, where we are heavily invested.
For over a year, I’ve been writing about how expensive valuations in the equity markets were. We weren’t dialing up the risk trying to keep up with the highest flyers, but instead we took a disciplined and prudent approach, knowing that we are dealing with your hard-earned money, which you rely on to fund things such as your retirement. After this major selloff, valuations are getting much more attractive, but people are selling without regard to value. Many people get caught up in the panic, thinking they can go to the sidelines now and then magically get back in when all clear sign comes. In financial markets, there isn’t an all-clear sign. Very few people were talking about risk earlier in the year, and now they are consumed by it, as the risk is actually decreasing with the cheaper valuations.
Often these types of panics end with an intraday reversal. Markets selloff dramatically, only to turn positive when nobody expects it. If you panic, you’ll easily miss it. JP Morgan just had a note that “7 of the 10 best days in the market occur with 15 days of the 10 worst days.” When people panic, they sell their stocks at fractions of their intrinsic value and then miss out on the most explosive segments of the recovery. When we invest in the stock market, we know we will endure these periods of heightened fear and volatility. I like to equate it with flying in an airplane when you know you will experience turbulence from time to time. Panicking when you get volatility is like jumping out of the airplane when you hit turbulence. It’s a surefire way to blow up your financial future.
This tariff battle is not Covid-19 lockdowns. It’s not the economy stopping and people not able to go to work, fly on airplanes, eat at restaurants etc. The tariffs were the spark of a bunch of dry tinder, which was an equity bubble, which we have been writing about for at least a year, and which was evident in just about every metric. Fortunately, we have been preparing for this, and we should be positioned well to capitalize on the opportunities that it presents.
As someone with a lot of experience dealing with markets during stressful periods, I want to leave you with a few recommendations if you are feeling anxiety. Don’t spend much time watching the news. They literally sell panic and fear. Don’t check your account balances very often. Keep your long-term goals in mind. Historically, stocks have performed exceptionally well 1, 3, and 5, years after these major panics. Lastly, it always looks darkest right before it turns. Some of my biggest successes as a financial advisor have been talking people off the ledge of panicking. There have been a few times when I wasn’t able to, and I can tell you that those few people that have done that all have tremendous regret for it. We will land this plane safely. Ultimately, this type of volatility should present very attractive opportunities for us to build wealth.