What Goes Up...

I have been around the financial markets for over 20 years now and the reality is that the markets are truly sustaining unprecedented moves. While I have seen panic and fear in the markets, never have I really seen the volatility that we have seen in the past 3-4 weeks. The Volatility Index (VIX) is proof of this as it has reached record highs which have surpassed those seen in the Financial Crisis over 10 years ago. That says plenty as the Financial Crisis was the closest to a systemic shutdown since the Great Depression.

It has proven that the old saying of "what goes up, must come down" is alive and well. Despite the world economy showing signs of being in its best shape ever with historic asset values and low unemployment, the uncertainty surrounding what the impact of a global pandemic will be has truly hurt the prospects of the future. Asset values are based on future expectations so while the reality is that Companies today are probably not worth 30-60% less overnight due to the pandemic, the reality is that the uncertainty of the future skews the opinions of investors to determine true value.

It happens on both sides, up and down. Tesla is probably the best example I have seen in recent times. Before the pandemic hit the markets, we saw Tesla hit remarkable valuation levels due to its out-performance in the business it is in. Given that investors were so polarized to its future (and valuation), those that had bet against it were temporarily forced to go with the trend. The stock and its valuation skyrocketed in a very short period of time. Unfortunately, it has now comeback down by over half of the move.

However, Tesla continues to be much higher than it was before the move. It has also made some great decision during the move higher like raise capital at a high valuation. While it upset investors, it now has the liquidity it needs to not only continue its growth and innovation but also to weather the economic downturn that is probably upon many in its industry. It has some liquidity issues in the past so imagine if they did not raise the capital and that time and its prospects leading into a likely economic recession?

These will be the decisions in the coming weeks that will separate the strong and the weak in the economy. The uncertainty of how the pandemic will impact the economy is now more clear as it will lead to a significant slowdown but the length of the impact is yet to be seen and will be the focus now. Governments are again taking out their checkbooks to support the economies and businesses but they have never been efficient at working together so uncertainty remains. The crisis is health related but can easily flow into other areas if not taken care of.

This will be another lesson to learn from and will produce interesting opportunities in the markets. Given the need to be socially distant and isolate ourselves, it its providing a good opportunity for many of us to look inward and determine our next steps. This could be an opportunity for each of us to reinvent ourselves and push forward a reset to move forward and come out on top. The one thing we do know is that after every crisis, change remains. We must learn to adapt and be prepared for the evolution ahead!