Last month stock markets experienced a mini crash, accompanied by dire headlines and prominent Wall Street experts calling for emergency Fed rate cuts. After a long period of serenity in the markets, we experienced a few strong down days.
In addition, the VIX, which is a measure of volatility, spiked above 60.1 The last time the VIX spiked so much was during the Global Financial Crisis and COVID. Was this that bad? Of course not. There were “reasons” for the move, but none of them were good or lasting. The main reason for the drawdown and spike in volatility was that investors overreacted.
Within a few days of this mini crash, the markets experienced a strong recovery. It took less than two weeks for the markets to recover. It was as if the mini crash never happened.
Par For the Course
Experiencing big and sometimes scary selloffs followed by rapid recoveries is not uncommon. JP Morgan has found that some of the best days follow some of the worst days. And, historically, those that bailed during those bad days greatly underperformed those that stayed the course.
It is no different today. An investor that sold after the scary drop on Aug 5 would have missed out on the rapid and strong 8.5% recovery over the next 3 weeks.2
Lesson for the Ages
This is a great reminder that we should always expect the unexpected. And when that happens, we can remember that ignorance is bliss…we can choose to not pay attention to short-term outcomes. Ultimately, I want to ensure the plan we created for you, not short-term outcomes or feelings of the day, guides your investment decisions.
©The Behavioral Finance Network
The CBOE Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility. Volatility, or how fast prices change, is often interpreted as a gauge of market sentiment and degree of fear among market participants.
Assumes sale at close on 8/6/2024 and uses closing price on 8/27/2024 using S&P 500 Index as proxy for the market. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indices are unmanaged and may not be invested into directly.
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