Investment markets can be confusing. To try to cut through the chatter and investment slang, we present this monthly view to you. We want to give you a 50,000-foot view of market conditions updated as our view evolves. Currently, our Investment Climate Indicator remains at “Stormy”. Stormy means that bear market rules apply, and we believe could be a period of wealth destruction.
This year, March has come in more like a lamb and less like a lion.
As the chart below shows, the CBOE S&P 500 Volatility Index, an oft-quoted measure of anticipated stock market worry, returned to its pre-October area.
The past 5 months have seen a range of investor emotions. But, as has been the case for 10 years now, calm was quickly restored. We are still clearly in “Stormy” weather from an intermediate-term perspective, but as I have written here in the past, that doesn’t mean we can’t have some “rips” to the upside among the wealth-impeding “dips” like we saw on two occasions last year. The key point to understand right now is that while returns can be had, pursuing them involves a historically-high degree of risk.
The VIX, a market perception of fear, does not tell you that. But the VIX is not a predictive tool as much as it is a snapshot of how fearful investors are right now. So, yes, I am telling you that risk of major loss is still high. History and a wealth of indicators about the global economy are pointing in that direction.
High-frequency trading, massive amounts of assets invested similarly, and interest rates that are too low to provide a decent cushion for central banks adds up to a period where caution is king. We continue to be defensive, at the edge of the “Extreme Zone” in our portfolio positioning. Higher than normal short-term cash & equivalent investments and extreme selectivity in equity portfolios remain the priority.
