2020 has been a difficult year in the financial markets. Brexit, COVID-19, US elections, a backdrop of US-China trade tensions, and apparently highly stretched equity valuations. On top of this we have central banks running out of ways to support the economy as central banks around the world have low or even negative rates. Then we have needed fiscal stimulus to help from Govt’s When you put these issues into just one paragraph it is no wonder that volatility has been high. With US elections approaching it is now likely to get even higher.

Bloomberg’s Garfield Reynolds did an interesting chart combining the ‘relative fear levels’. This was how it 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. These inputs were added together. When they were it gave the highest combined score on record going back to when VIX futures started in 2004! Take a look at the chart below:

Therefore, with uncertainty ahead it is easy to see why some investors will retreat to cash in the near term. They will want to ride out some of the near term drama.