Fear and greed are constants in the market. On Friday, fear reigned. Stocks saw their greatest one-day percentage decline since February. The Volatility Index (VIX), also known as the fear index, spiked 54% – the fourth greatest one-day percentage rise since 1990.
Uncertainty surrounding the new Omicron variant remains, including its transmissibility, severity, and vaccine responsiveness. Additional uncertainties around how policymakers will react to this new variant and how much this could weigh on global growth linger. So, it’s easy to see why investors sold first and asked questions later.
We invest in a constant state of uncertainty. Some periods feel more uncertain than others. In our investment process, we focus on getting the weight of the evidence tilted in our favor to make better-informed decisions. We seek to reduce emotions, which often lead to doing the wrong thing at the wrong time.
And, the evidence suggests selling on the type of fear seen on Friday has often been the wrong decision, at least longer term. Indeed, when we look at the previous instances when the VIX spiked more than 40% in one day, stocks were higher 18 out of 19 times a year later, with an average gain of 20%.
That does not imply stocks always rally immediately. In several of the short-term periods we reviewed, there were sharp drawdowns. This time could also be different. Still, this data suggests staying with the primary market uptrend, even while being prepared for wide short-term price swings.
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