The High Vol Is Coming…or Is It?

Within the financial community, there’s a vocal group that is regularly beating the digital drum about the impeding collapse of global economic order. This cohort has undoubtedly always existed, but the proliferation of social media gives them a powerful echo chamber. Many of the loudest voices lived through the financial crisis in 2008 and seem to genuinely anticipate another cataclysmic risk off event.

In some ways they behave like a modern day Paul Revere on his “Midnight Ride.” Except Revere gave a clarion call on one evening in April of 1775. If he made the ride to Lexington, MA, every day between 1760 and 1775, history would remember him more like The Boy Who Cried Wolf. 

Perhaps the economic doomsday preppers are right. It’s more likely they are wrong. The issues are numerous.

Data Deluge

There’s always some ominous data. Whether it’s youth unemployment or real estate in China, the housing market in the U.S., a potential government shutdown, student loan resumption, the UAW strike or government debt passing $33T, the list is potentially endless.

The economy is global. There are countless interconnected inputs, outputs, and throughputs. There are byproducts. There is efficiency and some waste. There are markets where the marginal prices are set. In general, it works!

Here’s a look at global GDP since 1985 with projections for the next few years from Statista. Full year 2023 GDP is expected to come in around $105 trillion. The overall trend is clearly higher, but the slowdowns in 2009, 2015 and 2020 are apparent.

Interestingly (or perhaps ironically), the Nasdaq-100® Index (NDX) made a local top on Halloween of 2007. The NDX wouldn’t eclipse the highs from 2000 until late in 2015. The drawdown between Q4 of 2007 and March of 2009 was significant. The NDX fell by ~53% over those five months.

For the most part the “economic collapse” argument is not predicated on seasonality. Those forecasts just tend to percolate at this point in the year.

In fairness to the prophets of doom, there is a history of higher market volatility in September and October. The last two weeks of September produce some of the worst average returns for the broad market. These averages are skewed by the events of 2008, specifically when Congress failed to pass the TARP (bailout) plan on the first vote.

In other words, the period between September and November has exhibited the highest level of realized volatility for U.S. equity markets. October stands out with an average realized volatility around 18% (S&P 500 Index (SPX)) compared to an annual (monthly) average of 15.08%.

A Different Perspective

I’m in no way making light of periods of high volatility. They can wreak havoc on portfolios, particularly if you’re nearing retirement age. There have been downturns throughout economic history and there will be more in the future. The cycle will continue. Almost without fail, declines have given way to higher highs.

The sequence of returns unequivocally matters, but so too does maintaining perspective. Here’s a look at the performance of the NDX from the 2007 highs through the end of August 2023. The visual also shows the path for the SPX, Dow Jones Industrial Average (DJX) and Russell 2000 (RUT) over the same period.

You could look at the chart above through a variety of lenses.

• It took years for equity indexes to surpass old highs.
• Small caps have dramatically underperformed over the past 15 years.
• The DJIA and SPX have (surprisingly) similar performance.
• The NDX returned more than doubled those of the SPX with only slightly higher realized volatility.

Control?

Very little is genuinely within our control. Economic cycles and the path of equity indexes are most certainly outside our charge.

However, given the growth of index options, we can exert considerably more authority over personal portfolio exposure. It’s possible to use the family of Nasdaq-100 Index Options (NDX) to customize your risk/reward profile more readily than ever before.

Whether you’re concerned about the potential for a severe pullback in the short or long-term – there are options for you. If you’re willing to potentially forgo some upside participation, it’s possible to offset some or all the cost of protection. The options (pun intended) are essentially endless.

Listen to Yourself

It’s easy to be swayed by outspoken pundits, but their agenda could be very different than yours. It’s possible that the U.S. economy falls into a recession. In fact, at some point… it will. That’s how economic cycles work.

Think first and foremost about the index you want exposure to. Consider how much risk you’re assuming and if there are ways to manage the uncertainty with index options. There will always be groups articulating a worst-case scenario.

Over the long haul, positioning against the U.S. economy has been a losing proposition. Now, more than ever, it’s possible to tailor your exposure with NDX index options.

Index

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