Market’s Fear Gauge Jumps 50%
The uneasy trade war truce between the U.S. and China appears to have ended over the weekend. President Trump tweeted Sunday a threat to turn up tariffs to 25% on $200 billion worth of China’s goods by Friday if ongoing trade talks don’t make serious progress.
Doubling down on the threat, the White House also suggested another $325 billion in new tariffs could be slapped on China.
No surprise that stocks swooned to start the week in volatile trade. Interestingly, after an initial Dow drop of nearly 500 points Monday, stocks clawed their way back, with the blue chip index down less than 70 points by the close.
Volatility Is Back With a Vengeance
In fact, the CBOE Volatility Index (VIX), aka the investor “fear gauge,” experienced a single-day jump of nearly 50% to start this week. That’s the biggest leap in stock market fear since, gulp, October 2018, when the Dow was in the midst of a 20% correction.
While I do not expect such a steep market sell-off right now, there are two important takeaways to remember when markets turn turbulent.
First, look but don’t leap.
Whenever you see overnight selling squalls like we’ve seen again this week, it’s better to let the storm pass before taking action. Don’t jump into new trades or sell stocks in a panic on the assumption that the opening print for the stock market will be much worse by the close.
Monday’s nearly 400-point Dow turnaround is a perfect case in point. Anyone who sold on the open — or, worse, went short — got the worst price of the day for their trades.
Keep an Eye on the “Smart Money”
The second takeaway is seek quality amid volatility.
Smart money flows into the highest-quality stocks when markets turn volatile.
That means invest your cash in dividend-paying blue chip stocks with strong earnings stability and top financial strength ratings (A or better). These are the stocks that will outperform the overall market, and often by a very wide margin, as you can see in the chart above.
The Dow gained over 14% over just the first four months of 2019. That’s one of the strongest starts to the year on record, but it also means that a volatile pullback for stocks was bound to happen at some point.
This could be the start of some increased market turbulence, but I expect stocks will fully recover. In the meantime, don’t overtrade and seek out high-quality stocks.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch