{"id":4275,"date":"2020-05-20T08:11:09","date_gmt":"2020-05-20T15:11:09","guid":{"rendered":"http:\/\/springwaterwealth.com\/?p=4275"},"modified":"2020-05-20T08:12:13","modified_gmt":"2020-05-20T15:12:13","slug":"markets-rapidly-price-information","status":"publish","type":"post","link":"https:\/\/springwaterwealth.com\/markets-rapidly-price-information\/","title":{"rendered":"Markets Rapidly Price Information"},"content":{"rendered":"

Nobel laureate and University of Chicago finance professor Gene Fama<\/em><\/h4>\n

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The market continues to process information and assign value to investments. This is exactly what markets should do, but it\u2019s much more challenging when we\u2019re in the midst of a global crisis.<\/p>\n

While we might like to think that the market is rational, the volatility of the markets over the past few months could lead one to believe that investors are manic.<\/p>\n

The VIX is one way to assess the volatility of the markets. The Chicago Board Options Exchange (CBOE) created the VIX in the early 1990s. It is derived from the prices of options on the S&P 500 Index. Because the S&P 500 Index is fairly representative of the US stock market, the VIX offers an assessment of the level of fear among investors. Below is a chart of the VIX from the start of the year.<\/p>\n

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Source: https:\/\/www.macrotrends.net\/2603\/vix-volatility-index-historical-chart<\/em><\/p>\n

We can see that investors became increasingly anxious as news of the novel coronavirus emerged. The VIX is often called \u201cthe fear index,\u201d because it gauges the worry that investors have about the economy and the stock market.<\/p>\n

As extreme as this spike might seem, the VIX actually hit higher levels in October 2008 during the Great Recession. For perspective, the VIX has hovered between 10 and 30 for the last three decades.<\/p>\n

The Markets<\/strong>
\nThe Dow Jones Industrial Average was up 911 points, or 3.85%, on Monday. The S&P 500 Index rose 90 points, or 3.15%. Yesterday, the Dow was down 391 points, or 1.59%. The S&P 500 Index fell 31 points, or 1.0%.<\/p>\n

Explaining Market Gyrations \u2013 A Two Day Sample<\/strong>
\nSo, why, you ask, was the market up over 3% on Monday? The answer: Good news.<\/p>\n

On Monday, investors learned that the Federal Reserve remains capable of providing more support for the economy. Fed Chairman Jay Powell indicated during testimony before a Congressional panel that the central bank will use its \u201cfull range of tools to support the economy.\u201d The Fed has already provided trillions of dollars to soften the impact of the novel coronavirus. But investors sense more may be needed. Powell said, \u201cWe are not out of ammunition by a long shot.\u201d Good news for investors.<\/p>\n

We also learned that pharmaceutical company Moderna has produced a vaccine for COVID-19 that has shown promise in early-stage human trials. The Cambridge, Massachusetts-based company will move to a large-scale clinical trial in July. If that goes well, it\u2019s possible that the Food & Drug Administration may approve emergency use of the vaccine in the fall. A vaccine would be a complete game-changer and the market reacted positively to the hopeful news.<\/p>\n

States are beginning to relax their measures to prevent the spread of the virus. This will pull industries out of hibernation and enable companies to resume operations. Business have to operate to generate earnings. Investors values companies based on their earnings. So, the resumption of activity is additional good news for the market<\/p>\n

So, what happened on Tuesday? The answer: News that wasn\u2019t so good.<\/p>\n

Chairman Powell and Treasury Secretary Mnuchin both testified before the Senate Banking Committee. Their testimony was reassuring, but not enough to prevent the market from dropping on other news. That other significant news was that Moderna\u2019s report about its vaccine candidate lacked sufficient data. So, the foundation for the market\u2019s jump on Monday was undercut a day later and investors reacted accordingly.<\/p>\n

Investors got more cold water poured on them when Boston Federal Reserve President Eric Rosengren cautioned, during an interview on CNBC, that much of the economy depends on stopping community spread of the novel coronavirus. He pointed out that more than 20% of American jobs are in the retail, hotel, airline and restaurant industries. If people, particularly older people with more discretionary income, are not comfortable entering malls, staying in hotels, flying on planes, and dining in restaurants, the economy won\u2019t recover to its pre-virus levels. He also cautioned that if the country opens too rapidly, we run the risk of a second wave of infections and the economy will be worse off. He said that government officials should let the data direct the speed at which they re-open. We have heard this numerous times from Dr. Anthony Fauci, a key member of the White House Coronavirus Task Force. The virus, he has said, determines what happens and when, not politicians.<\/p>\n

We discourage clients, friends and colleagues from following the market on a daily basis. It\u2019s not the best use of your valuable time. It\u2019s also not good for your mental and emotional health. But we thought we would take the past few days to explain how investors \u201cprice in\u201d information. This process is rapid and efficient. It is precisely how robust markets work.<\/p>\n

COVID-19 Numbers<\/strong>
\nGlobally, across 187 countries, there have been over 4.9 million confirmed cases and over 323,000 deaths. In the US, over 1.5 million have been infected and nearly 92,000 have perished.<\/p>\n

Gratitude<\/strong>
\nWe will wrap up our writing today with three more things for which we are grateful:<\/p>\n