Chart of the week

Liaan Burger
  • 1 Week Ago - 2024-09-09 00:00:00
In uncertain times, markets can become highly volatile, leading investors to rather hold their funds in safer assets such as fixed income instruments to protect their capital.
In times of greater uncertainty, such as during war or financial and economic crises, the US Aggregate Bond Index's performance rises while the S&P 500’s performance falls. The VIX is known as the Market Fear Index, and measures the degree of uncertainty/volatility in equity markets. The VIX tends to have an inverse correlation with equity returns, meaning as the VIX increases, equity performance is down, and fixed income assets tend to perform better.
High uncertainty was seen during major events such as the dot-com bubble burst from 2000 to 2002, where tech stocks rapidly declined. The same was seen during the 2008 global financial crisis, ultimately causing the S&P to lose more than 50% of its value. Such events lead investors to flee to bonds, where the interest rates were cut to near-zero levels - which not only made it a safer option, but an attractive one (as interest rates fall, bond prices increase).
During the peak of the Covid-19 pandemic, markets became highly volatile and liquidation occurred where markets sold off, which led to a drawdown of 30% in the S&P 500. At the same time, interest rates dropped sharply, resulting in stronger performance for the US Aggregate Bond Index. Although, through monetary and fiscal stimulus, as well as a rise in tech stocks, the S&P quickly recovered and made new highs at the end of the year.
The Russia-Ukraine invasion led to multiple geopolitical disparities and disruption in energy prices, which again led to higher volatility in markets, but in this case, both the S&P and the US Aggregate Bond Index dipped in performance because rising inflation and expected interest rate hikes caused a decline in bond performance.
During global uncertainties, investors quickly pull out of riskier investments (such as equities) and diversify into safer assets (such as fixed income) to protect from large investment losses.