Greed and fear
This may all be academic if markets regain their footing. A rally is by no means out of the question as investors do seem to have rather lost their marbles – a surge in the Vix, or fear index, to an intra-day high of 65 last week suggested that markets at one stage feared an outcome as bad as that seen in 2008 during the Global Financial Crisis, or 2020 during the pandemic.
In this respect, the Vix could be a handy contra-cyclical indicator, at least in the near term.
The long-term average reading for the so-called ‘fear index,’ which is used as a measure of anticipated volatility in the US stock market, is 19.
A long spell of readings at 12 or below can be suggestive of very bullish sentiment, even complacency, so it may not take much to frighten markets into action. Equally, a rash of readings above 30, or spikes higher still, could be suggestive of panic and therefore that markets may be oversold as investors blindly dump stocks.
Friend or foe
In this respect, volatility can be the investors’ friend, as it presents them with a chance to buy assets cheaply (when others panic) or sell expensively (when others get carried away). The skill is to build a portfolio with sufficient downside protection and robust characteristics that it can see the investor through to the other side of any squalls, without them becoming a forced seller due to too much risk.
All this does is distil Warren Buffett’s maxim that investors – if they are brave enough to try and time the markets – should be fearful when others are greedy and greedy when others are fearful.
Ultimately, valuation and the price paid dictate long-term investment returns, not fancy narratives, whether they are AI-related or not.
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