Markets Move Quickly

April 9, 2020

Market volatility is not gone.  As you can see below, the volatility index (VIX), which helps quantify the level of volatility, is still at a very heightened level.  Thankfully recent volatility has been of the good kind when markets go up:

Risk & Reward

Volatility, when it is this high, can lead to uneasy feelings in one’s stomach, but heightened risk tends to lead to heightened rewards over time.  This is part of what makes investing hard.  When fear is at a high, it’s easy to look for cover rather than lean into the opportunities.  But as we’ve discussed in some of our recent Wealth Watches and videos, the best days a lot of times are stacked right next to the worst days.

When markets move, they can move quickly.  We’ve seen evidence of that in the last few weeks.  In the three days after the 3/23/2020 market bottom, the S&P 500 moved north by nearly 18%.  In the last three days (through 4/8), we’ve seen the S&P 500 move up by over 10%.  It’s not because it’s safe to go outside now.  It literally isn’t.  We’re all still sitting in our homes and living daily life far different than what would have been pictured just a few short months ago.  But markets move ahead.  Recoveries happen.  That’s factual.  The timing of it is always the question.

Diversification

Something we have continually talked about over time is the benefit of being diversified, but also tilting a portfolio towards portions of the market that help performance over time.  Two of those specifically are small caps and value companies.  The opposite types of companies (large growth) have been dominant in the last several years, but another reminder in today’s volatile market is that this gap can change quickly too.

In the rallies referenced above for the S&P 500, small value outperformed large growth by over 2 and 3%.  That might not sound like a lot, but think, that was over just two and three-day stretches of time.  And right now, we are at gaps in valuations between growth and value, large and small, that are on par with what we saw in the 90s and with the tech bubble.  The disconnect eventually corrects.  Again, the timing is always the unknown.  If we extrapolate the recovery days we are seeing as of late and look back in time to the early 2000s, some significant trends pop out:

Over this 5-year period of time, a small value investor was actually over 26% per year better off than a large growth investor.  This works over time.  It doesn’t matter when exactly it turns, but when it turns, it does matter that your portfolio is properly positioned to take advantage of the valuation gaps this market has provided.  You are positioned this way, and when the benefits come, the reward will be felt.

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Future performance of any investment or wealth management strategy, including those recommended by Balasa Dinverno Foltz LLC (BDF), may not be profitable, suitable for you, prove successful or equal historical indices. Historical indices do not reflect the deduction of transaction, custodial or investment management fees, which would diminish results. Any historical index performance figures are for comparison purposes only and client account holdings will not directly correspond to any such data. BDF clients must, in writing, advise BDF of personal, financial or investment objective changes and any restrictions desired on BDF’s services so that BDF may re-evaluate its previous recommendations and adjust its investment advisory services. BDF’s current written disclosure statement discussing advisory services and fees is available for review at www.BDFLLC.com or upon request.

Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from BDF.

The S&P 500 Index includes a representative sample of the largest 500 companies in the U.S.

The Russell 2000 Value Index® measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.

Russell 1000 Growth TR USD The Russell 1000 Growth Index measures the performance of growth stocks drawn from Russell 1000 index. The complete market capitalization of Russell 1000 index is divided into growth and value segments by using three factors: price to book ratio, forecasted growth and sales per share growth. The index is market capitalization weighted.

CBOE S&P 500 Volatility Index (VIX) was created by the Chicago Board Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors’ sentiments.