Four data items today:
#1: Putting the 75-handle close (75.5) on the VIX into a historical perspective.
- It is the 4th highest close since the VIX started in 1990. The only higher levels:
October 24th, 2008 (a Friday, 79.1) and October 27th, 2008 (a Monday, 80.1)…
…and November 20th, 2008 (a Wednesday, 80.9). November 19th (Tuesday) saw a 74.3 VIX close, the old 4th place record.
- Importantly, in both sequences of similar VIX levels, US stocks staged powerful bounce back rallies shortly thereafter:
The S&P 500 rallied 10.8% on October 28th 2008 (the Tuesday right after those 79/80 readings).
On November 21st (Thursday) and 22nd (Friday) the index was up 6.3% and 6.5% respectively. Worth noting: the old 5th place record for the VIX was November 21st (72.7).
Bottom line: we’ve never hit VIX levels such as today without the S&P 500 immediately and sharply bouncing by +10% over 1 or 2 days. That needs to happen either Friday or Monday, or we are truly in uncharted waters.
#2: Retail investors bought today. Here are the ratios of Buy/Sell orders from Fidelity’s website:
- Apple: +2.0x more “Buy” than “Sell” orders
- Microsoft: +2.5x
- SPY: +3.0x
- Amazon: +2.6x
- Tesla: +1.7x
- TQQQ (3x QQQs): +1.6x
- Disney: +4.1x
- Boeing: +3.3x
- Inovio Pharma: +1.4x
- TVIX (2x VIX): 1.0x
Bottom line: maybe retail intuitively knows the VIX levels in Point #1, or maybe they’re still seeing the volatility as a buying opportunity.
#3: Lost in much of the conversation about US equities is the fact that European bank stocks are well through their 2012 lows. We usually look at the Euro STOXX Bank Index for this group, but here is a chart of the MSCI Europe Financials Index (EUFN ETF). It has much higher exposure to the UK (29%), Switzerland (15%) and Germany (13%), so it is a more conservative reflection of the current environment than the STOXX Banks, which is heavier in Spain (28%), France (25%) and Italy (21%).
Nevertheless, it still looks awful as this 10-year Marketwatch chart shows:
Bottom line: this is one real epicenter of the market’s concern about what COVID-19 means to the global economy and emphasizes the challenges to the European economy.
#4: While equity markets are treating COVID-19 as a 2008 Financial Crisis-style event (see Point #1), high yield corporate debt markets are nowhere near that level of pricing just yet. Here is a chart of junk grade spreads back to 1997. The closing print today was about 775 bp over Treasuries, in line with Q1 2016’s peak but nowhere near the +1000 bp highs of the crisis:
Bottom line: junk debt spreads should not get back to the 2008 highs if the US banking system is really well capitalized enough to continue to lend and willing to do so. Yes, sectors like Energy and Consumer Cyclicals have their issues just now, but those are 15% and 9% of the high yield market. Like getting a stock market bounce in the next day or two, seeing junk spreads hold here will be an important sign that financial markets are not discounting something truly unprecedented.