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The TINA Effect

Professional financial advisor Manish Kataria comments

2020 was a year nobody expected. Around this time last year, Covid was preparing to unleash itself into the world with devastating consequences that we are living with now.  And yet, in spite of all that has happened the investment landscape has been remarkably stable.

That may be hard to comprehend, particularly when we are living through the largest economic downturn in living memory, with big increases in unemployment and fiscal debt in many countries worldwide. Despite the backdrop, markets are currently an oasis of calm.  After the initial panic sell-off and the lows reached in March 2020, stock markets have rallied strongly. At the time of writing, global equities have rebounded more than 50% and the US market has risen by 73%. Technology has been the star-performing sector with the tech-heavy Nasdaq index up by 102% since the Covid lows. Surprising indeed - news headlines often forget to report good news.

It’s not just the magnitude of the rebound that is remarkable, but the stability and calmness of markets is also noteworthy. The chart below plots the US “VIX” index, which is the level of implied volatility priced into equity options. Equity options are a form of insurance that institutional investors and hedge funds use to protect their assets against a market downturn. In essence, the VIX indicator reveals the demand for insurance by investors worried about a forthcoming sell-off.

Unsurprisingly, as the emergence of Covid intensified in Feb/March last year, the VIX exploded upwards as investors rushed to buy insurance to protect their investments. Since then, it is notable how the indicator has calmed down - and stayed down. A note of caution: readers should not take this alone to guide their investment decisions - low levels in VIX can (sometimes) indicate the calm before a storm!   

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