Fear in the markets isn't about what has already happened. It's about what could happen next.
Losing money hurts. It's painful... and scary. The "what ifs" start to feel like certainties. And that makes it easy for investors to overreact.
This is exactly what has happened lately. And folks have good reason to worry...
Tariffs have shaken up the world economy. In the process, stocks came darn close to falling 20% from their highs – which would have marked an official bear market decline.
Market volatility has soared to one of the highest levels ever. But surprisingly, this isn't a danger sign. The fear is creating a positive setup... And it could mean a 23% rally over the next year.
Let me explain...
A Bright Stock Market Forecast After Fear Spikes
The recent spike in fear wasn't the normal rise you'd expect in an uncertain market. It was the third-largest jump in recorded history.
We can see this using the CBOE Volatility Index ("VIX"). The VIX, better known as the market's "fear gauge," uses the options market to determine the expected 30-day volatility for stocks.
The VIX tends to soar when options traders are seeking protection – in other words, when folks are panicking. And that's exactly what we've seen this month.
The VIX surged from less than 20 in late March to more than 50 at the recent peak. Take a look...
The VIX spikes in times of extreme fear. And the recent spike was the third-most extreme reading since the data began in 1990.
The only other times we've seen the VIX above 50 were in March 2020 (in the thick of the pandemic-induced stock crash)... and throughout late 2008 and early 2009 (during the worst of the global financial crisis).
We know those were smart times to put money to work. But to get more examples, I looked at every unique time the VIX spiked above 45. That has happened seven other times. And overall, they were fantastic opportunities to buy stocks. Take a look...
In the words of investing legend Warren Buffett, it's wise to "be greedy when others are fearful." And history backs up that idea. You can crush the typical return on stocks if you buy when fear spikes.
Similar setups led to 3.7% gains in three months, 7.5% gains in six months, and massive 23.1% gains over a year. Plus, stocks were higher a year later 86% of the time.
Of course, there will be more volatility in the short term. There's no guarantee we've already seen the market bottom. But we are seeing the kinds of things that happen near market bottoms.
That's a positive sign. It means the worst could already be behind us. And that gives us the opportunity to buy aggressively once stocks begin trending higher once again.
Good investing,
Brett Eversole
Further Reading
"There's a lot of new information coming out of the White House that investors are still trying to price in," Vic Lederman writes. Moments like today bring a lot of uncertainty. But they can also lead to opportunities as these so-called "market ending" events drag on... Read more here.
The stock market will always give investors a reason to sell. But selling off positions due to fear is usually a mistake in the long term. That's because the worries of the day rarely spiral into the worst-case scenario... Learn more here.
