Weekend Stockmarket Meltdown

Is 2024 Foreshadowing 1987’s Crash

The stock market is teetering on the edge of a precipice, and the signs are ominous. As the VIX, often termed the “fear gauge,” soars, it is sending a clear signal: investors are bracing for a storm. This spike in volatility (up 77% going into the week of August 05,2024) is a reflection of mounting fears surrounding the economy, political tensions, and the looming US elections. In response, a flight to safety is underway, with gold and bonds emerging as the preferred refuges.

Safe Haven Surge

In times of uncertainty, investors traditionally turn to safe haven assets, and the recent market dynamics are no exception. Gold has seen a remarkable 5% rise over the past month,

while bonds have outperformed with returns of 7.5% to 8%, including dividends. These assets are delivering their best monthly performance since 2020, as the stock market, including the once high-flying AI tech sector Nasdaq, has plummeted by 10% over the past month.

Buffett’s Bold Move

Adding fuel to the fire, Warren Buffett, the Oracle of Omaha, has made a staggering shift in his portfolio. Over the weekend, data revealed that Buffett has offloaded a majority of his Apple stock, totaling $160 billion. Now, he holds more cash than Apple stock, a record $277 billion. This cash is being strategically funneled into bonds and bills, aligning with the broader trend of investors unloading stocks in favor of more stable assets.

VIX Insights: Short-Term Volatility, Long-Term Calm?

The current VIX futures term structure is painting a stark picture: higher prices for the next three months and lower prices thereafter. This typically indicates that the market anticipates heightened volatility in the near term but expects it to subside in the longer term.

Key Points:

1. Short-Term Concerns:

• Higher VIX futures in the near term suggest that traders and investors are bracing for increased market volatility or a significant decline in stock prices over the next few months. This could be driven by upcoming events or uncertainties such as earnings reports, economic data releases, or geopolitical issues.

2. Long-Term Stability:

• Lower VIX futures in the later months imply that the market expects volatility to subside and stabilize after the election in November. This suggests a belief that short-term issues will be resolved or that there will be a return to more normal market conditions.

Echoes of 1987’s Black Monday

The current market turbulence brings to mind the infamous crash of 1987, known as Black Monday. Similar to today, part of the crash was driven by investors seeking protection through mechanisms akin to the VIX. In 1987, it was the burgeoning use of portfolio insurance that exacerbated the sell-off. As investors rushed to hedge against losses, the selling pressure intensified, leading to a market freefall.

Back then, portfolio insurance strategies, designed to limit losses by selling stock futures as prices fell, created a vicious cycle. As prices dropped, more futures were sold, driving prices down further and triggering even more selling. The result was a cascading market collapse, with the Dow Jones plummeting -22%.

Today’s market shows eerie parallels. With the VIX spiking, investors are once again flocking to buy protection against anticipated declines and possible crash. This surge in demand for volatility hedges can create a self-fulfilling prophecy, where the fear of a crash leads to actions that bring about the very crash investors are trying to protect against.