Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

2nd Quarter | 2022

Market insights and analysis


Updates on how dynamic, risk-managed investment solutions are performing in the current market environment.


By David Wismer

I was listening to one of my favorite radio broadcasts last Friday morning (March 6), about 45 minutes before the market open.

Tom Keene, of Bloomberg Surveillance, was reviewing various pre-market levels.

Dow futures were down at the time around 700 to 800 points, and other indexes were similarly heading south in a big way. He made the curious comment, “It just does not feel like a 49-level VIX for equities at the moment”—even though that is where the VIX stood. (The VIX, also known as the “fear index,” is a measure of stock market volatility. On Friday, it went on to make a 52-week high over 50 before closing at 41.9.)

What did get Mr. Keene’s attention in a big way was the state of bond yields.

According to CNBC on late Friday, “The 10-year Treasury yield, which moves inversely to the price, continued its incredible march lower, plummeting to a new all-time low early Friday below 0.7% before recovering a bit. The 10-year yield broke under 1% for the first time Tuesday after the ill-received emergency Federal Reserve 0.5% interest rate cut designed to help blunt the virus’ economic drag.”

In writing this article midday on Monday, March 9, a lot has changed in a very short period.

Here’s what you may know already:

  • The price of oil has dropped about 19% as OPEC, Saudi Arabia, and Russia engage in a price war. Many energy companies were trading 30% lower, with some prices recovering a bit. Exxon Mobil is down now about 10%, after opening 13% lower. WTI crude oil is at $33, after trading below $30 in the overnight market.
  • Bond yields continue to plummet. The U.S. 10-year Treasury rate is at an unheard of 0.51% at the moment. TLT, the iShares 20+ year Treasury bond ETF, is up 6.9%.
  • U.S. equity markets triggered a “circuit-breaker” halt in trading shortly after the market open, with the S&P 500 down 7%. After some recovery after the resumption of trading, the S&P 500 is still down over 6% at this time.
  • Developments over the weekend on COVID-19 were being watched closely. According to MarketWatch, “The number of daily new cases of the COVID-19 coronavirus are finally declining in China. But the number is increasing in the rest of the world, from South Korea to Iran to Italy.”
  • The Cboe Volatility Index (VIX) hit a high over 60 before retreating into the 50s.

Cboe Volatility Index (VIX): One Month

Source: MarketWatch

Trying to stay on top of the latest price action is virtually impossible on a day like today—and not very meaningful in the long run. These numbers will undoubtedly change over the next few hours.

Here is one observation, from Bespoke Investment Group, that will likely not change:

“In the entire history of the S&P 500 ETF (SPY), there have only been three other downside gaps of more than 5%. The most recent was in August 2015, but today's drop will eclipse that. That leaves October 2008 and September 2001 as the only other instances. Looking at the S&P 500's performance following those prior experiences, while there were some short-term gains, performance was extremely volatile. In other words, get used to the types of moves we have seen over the last couple of weeks.”

Source: Bespoke Investment Group, 3/9/2020

One could not help but take notice of the recent market volatility, even before today’s action.

One financial adviser I know emailed me in the early afternoon Friday. By his calculations at that time, “The absolute SPX daily returns, absent whether higher or lower, stand at 17.5% this week, with virtually no net change!” After a strong comeback for equities on Friday afternoon, the Dow (DJIA) was actually up 1.7% on the week, the S&P 500 higher by 0.6%, and the NASDAQ Composite eking out a 0.1% gain.

I did my own calculations, looking at cumulative point moves on the Dow from intraday lows to intraday highs for last week, and found it moved just over 5,000 points, or close to 20%! (That, of course, will change after today. It may be more like 6,800 points, or about 26%, in cumulative movement—absent direction—over six days of trading.)

How are investors (and their financial advisers) to deal with such volatility?

The adviser referred to previously was interviewed for Proactive Advisor Magazine last year. He is quite savvy and places a high premium on active risk management for his clients’ portfolios. Here is a short excerpt from a lengthy note he wrote to clients last week:

“While our portfolios all have some bumps and bruises at the present moment, we have rules in place to help minimize the likelihood of your injuries turning into fractures and broken bones in the event this is actually the start of a new bear market, which is obviously yet to be determined. Adhering to those rules has rarely let us down, and thus is always the best course of action.”

Jerry Wagner, founder and president of Flexible Plan Investments (FPI), had a similar message in an article he first wrote here and republished in Proactive Advisor Magazine. I urge you to read, or re-read, “Are we in a ‘kids market’?” In this article, Jerry writes,

“History shows that a buy-and-hold approach or passive allocation that relies simply on diversification as a defense against a significant bear market is insufficient. History demonstrates that having other tools at hand—such as out-of-favor asset classes, hedging, timing, diversification among actively managed strategies, and other forms of responsive active management—can help mitigate or avoid losses when the bear is stalking us. Dynamically risk-managed strategies are built on such history.”

The benefit of just one element of strategic diversification has been apparent over the market ups and downs of this year. Looking at the performance of three key asset classes year-to-date shows how multiple-asset-class diversification can help mitigate the losses of any one asset class. (Remember, this is a simplistic illustration. Many of FPI’s core portfolio strategies employ multiple levels of sophisticated risk management.)

Included in the following chart are year-to-date returns through Friday, March 6, 2020, for gold, a broad index of government bonds, and the S&P 500.

 Source: FPI research, data through 3.6.2020

Regarding the market outlook, Jerry provided some further thoughts in that same article:

“Computerized or quantitative investing is based on the premise that stock market history repeats or, as Twain wrote, ‘rhymes.’ History provides us with two essential pieces of information: (1) the basis for determining the likelihood for the market continuing in the present direction or reversing, and (2) the actions that have worked best in the past to deal with similar circumstances in the present.”

Said another way, a sound approach for handling uncertainty and market volatility lies in the adherence to rules-based, risk-managed strategies that have been tested over time. That makes ultimate sense to me.

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