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Measuring Fear: A logical assessment of COVID-19 and its effects on the financial markets

Blogs about the coronavirus are dominating digital media and for good reason.  The virus is clearly impacting us at a quickening pace.  A clear impact is fear.  Case numbers and death tolls are shown on television and internet news seemingly all throughout the day.  Fear manifests itself in many ways.  Early signs have been through decreased travel, primarily air flight and cruise ships.  We are starting to see public gatherings such as sporting events being canceled or modified.

Fear, no matter what the source, plays an important role in the financial markets.

As we step back and gather clues, a logical path would be to look at what the financial markets did during prior times when there were threats of a worldwide pandemic.

Over the last few weeks, I have seen information like this in table and chart form (see below).  This information may give some degree of comfort, implying the historical tendency suggests very high odds of a gain in the intermediate term.  But what about the time in between day 0 and the six months out?

Markets have experienced unprecedented movements that have not been seen but just a few times in the last 100 years.  Is it logical to embrace the indication from a table or similar statistics of prior outbreaks?

Not just quantify it but to gauge its movement. The point is to move beyond interpretation of headlines and to focus more on interpreting human behavior.

A relatively recent period of a sharp decline from new highs was Q3 2018, followed by the rebound in Q1 2019.  Sure, this is not related to a previous virus, but the example shows a moving gauge of fear.  The VIX Index is commonly called the “Fear Index” for good reason.  In the chart below, the VIX itself is not displayed, but rather, a momentum indicator of the VIX. A momentum indicator measures the speed of price changes. Measuring the momentum (or speed of price change) of the VIX allows us to track that acceleration or deceleration of fear.  Even with the VIX smoothed by the indicator, it still has some gyrations.  If we follow the general direction and the overall zones, such as Fear Dominant or Calm Dominant, then we can get a better handle on the connection to the movement in the stock market.

Created with TradeStation. © TradeStation Technologies, Inc. All rights reserved

From May to October 2018, the Momentum of VIX was dominated by calm, allowing for the S&P 500 to trend higher.  Naturally, fear crept higher as the rally became older.  In early October, the Momentum of VIX moved out of the middle neutral zone and into the Fear Dominant Zone. At that moment in October, I’m sure some questions were asked that are being asked today such as, “What about precedents?” And, “How long should this last?”

The bottom-line question for today is, “How long is the crisis going to last?” and that question may have two basic answers.

The first may be related to the headlines and the second related to the stock market sell-off.  The two are not necessarily tied together.  Headlines may still be scary to the public but if some underlying forces are changing investor perceptions, then the stock market has a higher probability of improving.  In the chart above, the sharp drop in the Momentum of VIX at the very beginning of 2019 was enough to cause it to reach the Calm Dominant zone.  If the charts and tables in October 2018 stated the market would be higher six months later, then, yes, they would have been right.  However, this example shows the ongoing warning of the selling pressure for several months until the climate of fear changed.

Earlier this week I started to have a few body aches and a low-grade fever, both very minor.  Regrettably, I went into the office before sunup to get some work done, thinking I’ll go home if my condition worsened.  As people came into the office and became aware of my condition, the growing fear was palpable.  I was urged to go to the doctor, but to call first.  I called a well-known walk-in clinic but was told they were not prepared to test for Covid19 and was instructed to go to the emergency room.  I did and was given a screening tests, including a chest x-ray by medical personnel in full protective body suits.  I learned the hospital reports the findings to the local health department and then to the Center for Disease Control (CDC) for further instruction – to administer a rare Covid19 test or not.  Fortunately, it was determined I have a more common flu strain.  That said, I am writing this blog from quarantine – a self-quarantine but one advised by the doctors.  In the days since the emergency room visit, news on a local and federal level has intensified to where grocery shelves are being emptied even for seemingly random items.  I am seeing firsthand how the fear related to the headlines may get worse before getting better, but as a financial professional, I am monitoring the change in fear to get a better gauge on the impact to the financial markets.

Your Children and Inheritance

You invested wisely for forty years, building your nest-egg. You are in retirement now and enjoying every minute of it. At some point you realize that you will be leaving some of your investments to charity, and in many cases, most to your children. Over the next 30 years trillions of dollars will transfer from the “Baby Boomer” generation to their children.

You would be surprised how many working adults haven’t prepared for their own retirement.

The average 401k balance for 60-69-year-old individuals is $195,500 and the median balance in this age group is only $62,000. This means that half of soon-to-be retirees have less than $62,000 in their 401k accounts. Generally, by age 60 you should have six times your current salary in savings and at normal retirement (age 67) eight times your salary.[i]

Whether it be for health reasons, an ended marriage, not profitable investment decisions or a slew of other reasons, many adult heirs aren’t prepared for retirement due to a lack of assets.

Over the past 25 years I’ve seen what happens to client assets when transferred to their beneficiaries. An adult child (or heir) inherits an investment portfolio and instead of investing the inheritance, every penny is spent. “I had to pay off my debt, I wanted a new car, or a new house”, says the adult child. While debt is important to pay down, and a new car or home is not a malicious want, the hard earned money you have saved and worked for can be gone so quickly when you may have wanted this wealth to have a different impact in your children’s and future generation’s lives.

While your children may be mature adults with their own families, having the conversation with them on how you would like their inherited wealth to be treated is important. Equally important is helping them become knowledgeable about investing. The most important thing you can do right now, if you haven’t done so already, is to have a conversation with your heirs about investing.  Let them know about your intentions of their eventual inheritance and the importance of continuing to invest what you have already invested over the years so they can have a comfortable retirement. If you feel uncomfortable talking to your heirs about your investments, we can help.

You have several options to transfer wealth, from setting up a trust, identifying who is a beneficiary and the percentage he/she receives on your qualified retirement account(s) and setting up a Transfer-on-Death (TOD) individual account. An inheritance, if handled correctly, can ensure your heirs a comfortable retirement in the future. This can give you much-needed peace of mind. At Spectrum Financial we encourage our clients to talk to their heirs about the importance of investing. We enjoy having conversations with children and even grandchildren of our clients, whether in person or on a phone call. Call us today at 888-463-7600 if you would like to learn more about how we can help your children or grandchildren start investing today and be prepared to handle an inheritance in the future.

[i] Investopedia. What’s the Average 401(k) Balance by Age? See how your savings stack up. By Tim Parker, November 21, 2019.

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