Inversion

November 4, 2020 - Published by IAG Wealth Partners

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Inversion

Yesterday is now in the rearview mirror. Almost four years of committed effort, trillions of words, and billions of dollars flowed through the last election cycle, and today the 2024 Presidential campaign begins.

While there may be some uncertainty still lingering about yesterday’s election results, the results of the 2024 Presidential election are even more uncertain. The long-term future is generally less predictable than the next few days.

However, that is not what traders are telling us right now according to the so-called VIX indices.

VIX indices attempt to gauge what kind of volatility the markets will experience in the future based on underlying prices in the options market. Options give traders the right to buy/obligation to sell or the right to sell/obligation to buy stocks at set prices in the future.

A wider range of option prices indicates traders are more uncertain about the future while a narrower range of option prices indicates traders are fairly confident about how the future will unfold. Additionally, because the near-term future tends to be more predictable than the long-term future, shorter-term VIX indices are usually lower than longer-term VIX indices.

Last week Monday the 9-day VIX jumped up, quicky becoming the highest VIX index. The 1-year VIX index rose slightly, but became the lowest VIX index – creating a VIX inversion.

Such inversions can be a sign of potential near-term downside volatility in the financial markets. VIX inversions preceded both of our recent downturns in February 2020 and August 2019. However, there are also instances where option traders were wrong and the market did not decline following a VIX inversion.

While VIX inversions may have short-term implications, they should have almost zero impact on your long-term financial plan if it is properly designed. There is a reason there is no eight-year VIX index – because short-term volatility is not meaningful to truly long-term investors.

In the coming days traders are expecting some short-term volatility as the election results continue to be processed. Regardless of those results or traders’ reaction to them, your financial plan’s VIX should remain on track.

 

Quote of the week: Jeremy Siegel: “Fear has a greater grasp on human action than does the impressive weight of historical evidence.”

 


Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through IAG Wealth Partners, LLC, (IAG) a registered investment advisor and separate entity from LPL Financial.

The CBOE Volatility Index® (VIX®) is meant to be forward looking, showing the market's expectation of 30-day volatility in either direction, and is considered by many to be a barometer of investor sentiment and market volatility, commonly referred to as “Investor Fear Gauge”. VIX is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results.

Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

This Photo by Unknown Author is licensed under CC BY-SA

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