At least that’s what risk markets are telling us. Really, that is not a surprise when we look at the kind of the year 2020 has been. Think of what we have through this year – The recent renewal of Brexit risk, COVID-19, upcoming US elections, a constant backdrop of US-China trade tensions, some very highly stretched equity valuations and central banks are now running out of ways to support the economy. When you put all of these issues into only one sentence it is no wonder that volatility has been high this year. In all probability, the volatility is likely to get even higher.
Bloomberg’s Garfield Reynolds compiled a very interesting chart combining the ‘relative fear levels’ of the market to get a sense of what was coming. This was how the fear level was calculated. The Z scores for spreads between 3-month and 1-month vol for the yen and Treasuries. The Z score for 2-month VIX futures vs the VIX. When these were added together it gave the highest combined score on record going back to when VIX futures started in 2004. Have a look at the chart below:
So, with so much uncertainty ahead it is easy to see why some investors will retreat to cash. SO watch out for that possibility. It is very hard to invest in equities at the moment when you consider all the uncertainty there is. So, be nimble in these markets.