The greatest threat to the financial markets: Fear of the unknown

There is a thermometer that measures fear, known as the ‘volatility index’

Things will be less fearful as forecast models clarify what we are up against.
Things will be less fearful as forecast models clarify what we are up against.

JACKSONVILLE, Fla. – “The only thing we have to fear is fear itself.”

President Franklin D. Roosevelt said those words at his inauguration speech on March 4, 1933. It was near the worst of the Great Depression, and two days later, he did the unthinkable: He closed all the banks, which was the first step to ending the Great Depression.

Seventy-seven years later, to the day, the smartest people in the world -- bond traders, the managers of the world’s debts -- were doing something I thought never possible. They were panic buying into U.S. treasuries (bonds), buying despite their long-term annual yield of less than 1%. Yep, to me, the smartest people in the world were panicking. Why would you ever invest in something that was only going to provide you a 1% return on your money? Only one reason: They knew everything else was about to drop in price, and by a lot.

Since then (remember, this all happened over the past two weeks), the following has occurred:

  • The stock market has crashed, nearly 40%.
  • Airline stocks are down by more than 50%.
  • Crude oil is down 60%.
  • Gold and silver have declined 15% and 40%, respectively.
  • Even bond prices have declined by more than 10% from their recent history high prices.

The nation is in a state of emergency as the new coronavirus has been declared a pandemic.

Fear is what’s driving these financial extremes -- principally, fear of the unknown. The financial markets were in their infancy back in 1918, during the Spanish Flu. Their reaction then was swift, as well.

Where’s the good news? There isn’t much for the next four to eight weeks based upon the pandemic models I have seen. These models are constantly changing based upon new data, the latest data. One thing doesn’t shift much: our peak infection week (the number of people simultaneously symptomatic). This date varies with the forecast models but still indicates mid- to late-April.

This means some of the major unknowns will be recognized by the financial markets and very soon. The recent unprecedented rapid reaction by the Federal Reserve, Congress and President Donald Trump will be soon be digested by the markets and this will reduce uncertainty and reduce fear.

Fear that is right now is at an all-time record high, any reduction will be quite the relief to everyone, whether involved in the financial markets or not.

Side note: Some of you might recall I had won some stock-picking forecasts many years ago, yet I’ve remained at WJXT/News4Jax all these years. I love my job, serving you and our great community here in Northeast Florida and Southeast Georgia. I’ll write more on what I know during these unprecedented times in the weeks ahead.

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