In the Middle East, fears rose that heightened hostilities between Israel and Hezbollah would lead to an escalation of the conflict, including perhaps an initial Hezbollah attack on Cyprus. The first Biden-Trump debate seemed to reveal a seriously weakened US president running for a second term, leading to all sorts of speculations about new candidates or a clear victory for a more vengeful Trump. And while the ECB did cut rates as expected, a top official warned that the Fed might even need to raise rates to quell inflation.
Investors lost no sleep over these events, however. The CBOE Volatility Index – aka “the Fear Index” – ended June at its lowest month-end level since a brief dip in September 2018. If geopolitical events ought to induce fear, it didn’t spill over into the financial markets.
Empirically, the VIX behaves very much like the previous month’s volatility in the S&P 500, with a correlation of 0.9. In other words, June saw very subdued volatility, despite all the troubling events I’ve listed here – and then some. The S&P 500 actually reached another all-time high, though most European indices retreated somewhat.
If you ask me, this is a very sensible reaction. You shouldn’t let day-to-day events guide your investment decisions. A lot of bad stuff can always happen, but normally don’t. That’s particularly relevant when you’re about to go on holiday, which is probably the case for many of our Nordic investors. Relax and let the companies you’re invested in do their work. They generally do. And, if we have done our job as we should, they do it well.
Have a wonderful July!
Finn Øystein Bergh
Chief Economist & Strategist
Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on, market developments, the portfolio manager’s skill, the fund’s risk profile, as well as fees for subscription, management and redemption. Returns may become negative as a result of negative price developments. This is marketing communication.