Is the bottom in? Is the damage done? Nobody can answer those questions with any surety, but let’s look at some of the things we look at.
The first thing we always say is during times of panic (or stress in the system) is that everything “goes to one.” This means that, if there were differences in asset classes before, there isn’t a difference when the stress hits. They all become perfectly correlated, and here is where perfect isn’t a good thing!
Here’s a chart of the iShares Bond Aggregate (ticker AGG).
You can see the price went down recently, corresponding to a spike in interest rates (they move inversely).
At the same time that the S&P equal-weight index also goes down.
In fact, just about everything went down in this recent bout. Some things more than others.
In the bond market, the biggest issue is spreads – which is the difference in yield between bonds. Spreads widening typically signals stress in the market, as buyers of riskier bonds demand more compensation to hold those bonds. Below is chart of high-yield spreads versus investment grade bonds.
You can see that when things get a little wonky (technical term) spreads spike higher. They always come back down, but there’s no telling when. For far, as you can see, this recent bout of volatility did not see spreads widen as bad as we’ve seen in past periods.
Also, we’ve looked at the VIX (volatility index) in the past. Let’s take a look at it again.
You can see that the VIX is back down to 30 from a recent high of 60 (doesn’t show on this chart). That’s a good thing, but this bout of volatility may not be over just yet. I’m not saying the world will fall apart, but we don’t know what the administration’s next move will be. More tariffs or less? Delays or tariffs put back on? Will current tax rates actually get extended by Congress, or will that legislation stall? Are there other surprises we’re not even yet thinking about?
We can see that people can only stay super bearish for a short period of time, then things bounce back. I’ve shown you the AAII survey. Here’s another look at it.
It’s small but you get the idea – almost 2 to 1 bearish investors. It has been that way for the past month or so. Looking at a different fear gauge, we see that fear has subsided a bit from the lows of last week, but is still camped in the “extreme” category.
Again, it doesn't mean we’re through this period of volatility, but we have been saying for many weeks that our model is showing green shoots and it could be a week, month, or longer until it turns. For right now we are still risk-off and will stay that way until the indicators turn.
Cheers to all the Florida fans or those that had Florida winning the National Championship in your brackets. And speaking of green shoots, how about the M’s sweeping the division leading Rangers. We’ll take it! Back to the markets, if you have any questions or are losing any sleep, please reach out and we will be happy to have a conversation. And if this tax season has left you wanting to do some better tax planning for the year ahead, let’s chat. We’re here to help!