In recent weeks we have seen two important indications that market sentiment is returning to something which resembles a pre-pandemic normal. First, volatility continued its downward trend, with the VIX Volatility Index hitting 16.65 last Wednesday – its lowest level since before the pandemic, falling below the 20 level in March for the first time since February 2020. More normalised levels of market volatility (VIX) are in the 9 to 14 range, so the trend down back toward these levels is an important indicator.
Second, the US treasuries (government debt) market has withstood the concerns of rising inflation triggered by the strong US economic recovery and approval of large fiscal stimulus measures. Some higher inflation is to be expected in a strong economic recovery, and markets appear to have priced that in without much of a song and dance.
Worries about COVID vaccinations have though, sadly, remained prominent in news headlines. This time it was the Johnson & Johnson vaccine’s turn, with production of the shot paused to review data on potential rare side effects. The rare blood clotting also associated with the AstraZeneca Oxford vaccine is a very low risk outcome and in-line with many other routine medicines already in circulation. The hard facts are clear: the vaccines are safe, they work, rollouts are accelerating, and new variants can be adapted to with updated booster shots.
But fear is not rational, and it can drive short-term market sentiment. Ongoing and unjustified vaccine anxiety is symptomatic of a wider societal risk aversion which could have implications for markets. Fears stoked by news on new variants, localised COVID outbreaks, and vaccine effectiveness, detached from the very positive reality of the data, could result in further short-term bouts of market volatility.
These moments of COVID news-induced market jitters, in our view, will be opportunities to buy. The tide turned against the pandemic in late-2020 and the direction of travel is clear. Complacency is never helpful, even in the most placid periods of market activity, and so should always be avoided, but the vigilant investor should look through any fear-induced market weakness we may encounter through 2021 and remain focussed on the economic recovery, which is gaining momentum.
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