By: Ethan Berkebile, CFA, CAIA
When fear grips the market, investors often panic, selling off assets and seeking the safety of cash. But while markets often price in the worst possible outcomes in times of extreme declines, even remotely positive news can turn those markets around.
In viewing recent sharp declines, consider a few possible optimistic scenarios:
- Potential for trade negotiations: According to Secretary of the Treasury Scott Bessent, almost 70 countries have signaled their willingness to negotiate on trade. How might the momentum of early deals impact subsequent negotiations?
- Stabilization of geopolitical tensions: The Trump administration is now more incentivized to help bring about peace between Ukraine and Russia. Could peace in Europe bring stability to a large block of global consumers and businesses?
- Falling interest rates and oil prices: Oil and mortgage rates are down significantly. Could these trends prove to encourage increased spending by the American consumer?
Spikes in the “Fear Index” and What Happens Next
April 4, 2025 saw the 21st highest weekly close, 45.3, of the CBOE Volatility Index (VIX) since 1990. The VIX, or “fear index,” is a tradable asset that measures anticipated short-term S&P 500 volatility, and spikes in the VIX have been associated with market crashes, financial crises, and periods of high uncertainty. In terms of understanding the numbers, VIX values greater than 30 are generally linked to high volatility, while values below 20 generally signal stable, stress-free market conditions.
In the 20 prior instances of the VIX closing a week higher than 45.3, the S&P 500 has delivered strikingly strong total returns in subsequent periods compared to the average returns. Of note, even in the worst outcomes, investors still saw positive total returns.
Based on data from January 1990 through April 2025. High-VIX weeks defined as the 20 highest weekly VIX closes. Returns in periods greater than one year are compound annualized. Source: Creative Planning
Some of the most notable spikes in the VIX occurred during the 2008 financial crisis and the 2020 COVID market crash:
- The VIX hit 79.1 on October 24, 2008; the S&P 500 went on to return 122% (17% compound annualized) over the next five years.
- On March 20, 2020 the VIX rose to 66.0; the S&P 500 surged by 164% (21% compound annualized) in the subsequent five years.
Trust Your Broadly Diversified, Long-Term Portfolio
A core tenant to our investment philosophy is building portfolios with multiple asset classes. Such diversification helps you weather the storm. We add bonds for ballast, and private markets to get exposure to smaller businesses:
- High-quality bonds have behaved as we would expect, seeing a flight to quality trade as fear overwhelms equity markets.
- Our private market allocations are built primarily with U.S.-based middle-market businesses. Relative to their multi-national counterparts traded on global stock exchanges, they tend to be more reliant on U.S. supply chains.
Most of our clients have investing time horizons that extend beyond 20 years. As well, if one of your investment goals is to leave a portfolio for a next generation, you are inherently in this camp. Consider, then, that since 1926, there have been no 15-, 20-, or 30-year periods where U.S. stocks have had negative full-period, compound annualized total returns. Over those long periods, emotional buying and selling tends to wash out and fundamentals (i.e. dividends and earnings growth) drive long-term returns. Trade wars, while unpleasant in the short-term will likely not permanently impair the long-term nature of business globally.
In my conversations with our clients and advisors one thing is clear: Clients who’ve made emotional decisions to sell in the past have regretted it. While no one can predict short-term moves, elevated volatility is not a cue to run; rather, it is why a long-term stock investor can expect higher long-term returns.
Have questions or concerns? We can help. Contact your HBKS Wealth Advisor at 1-866-536-5776.
