Q2 2020 was one of the strongest quarters on record for equity markets. The Dow Jones added 18%, the S&P 500 was up 20%, and the Nasdaq rose by 31%. In Europe the STOXX 600 increased by 16%. This is an incredible bounce back in equity markets after the dramatic declines in February to March. However, volatility remains elevated and investors must remain cautious.
The VIX Volatility Index has been hovering between 30 and 40 over the last few months – significantly above its normal level (around 20), which indicates we are not out of the woods yet.
Keeping volatility elevated is the continuation of the coronavirus pandemic, which is far from over. Nevertheless, the data is moving in the right direction. The Robert Koch Institute reports that COVID-19’s R-rate (how many people each infected person will spread the virus to) has dropped to 0.63 in Germany (below 1 is good). China is also continuing to contain the virus, with almost the entire population of Beijing having been tested and the number of daily tests up to 450,000. Even in the US, where officials have recently warned that the window of opportunity to control coronavirus is closing, the number of states experiencing major outbreaks represents a minority of the population.
‘So far, so good’ some might say. The bounce back in equity markets has been strong, the economic data indicates we are seeing a solid bounce back in the economy and COVID-19 is under control in most large economies.
But VIX remaining elevated tells us something important. The true economic impact from lockdown is still unknown, with many business failures and job losses still to come. Further, the virus has not been eliminated, it could mutate into a more aggressive form and we could see another wave in late 2020 / early 2021. The improved economic data, decline of the virus and strong bounce in equities are welcome news, but it’s too soon to call the ‘all clear’.
The world is a more uncertain place now and will be for years to come. In such an environment, we believe investing in long-term, high quality, high growth businesses is the optimal strategy for investors. Consistent, profitable growth is now a scarce commodity, and now is a good time to buy it!
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