Market stress

Interesting chart shared by Denys Liutyi at Macrobond illustrating the relationship between market volatility and the performance of US equity markets. The volatility regime is represented by the average VIX over the year—often referred to as the “Fear Index.” The takeaway? Elevated market stress is not necessarily a reliable signal to buy. Markets can still close the year deep in negative territory, as seen during the bursting of the dot-com bubble in 2001 or the Global Financial Crisis in 2008. On the other hand, 2020—despite extreme volatility at the onset of the COVID-19 crisis—turned out to be a positive year for equities. We can certainly debate timeframes and statistical assumptions, but one thing is clear to us: volatility alone is a poor predictor of future returns. At European Capital Partners, we remain grounded in company fundamentals and take a long-term, business-owner’s approach to investing. That, rather than attempts to time the market, continues to be our north star.