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A HISTORICAL ECONOMIC DECLINE

A HISTORICAL ECONOMIC DECLINE

You are witnessing what finance experts refer to as a Black Swan event. That is defined as an unpredictable event that may portend severe consequences. Fortunately, such events are rare, but this event has the potential to have economic implications that could last for many months or even years. The rapid spread of the COVID-19 virus coupled with uncertainty about when the rate of new cases will finally slow is causing rampant volatility in the stock market. Consumers will hear much about the Volatility Index (VIX), which is a metric used to determine how much volatility market participants expect in the near future. The VIX generally spikes when the market begins to fall, as traders rapidly work to hedge against more losses in their portfolios. As a result of the recent market decline, the VIX shot up to 77, almost matching its peak of 89 in 2008.

 Even if the current bear market resolves faster than the historical median of 64 weeks, investors should be prepared for prolonged volatility as the number of coronavirus cases increases over the next several weeks and the economic toll becomes clearer.

As for when the market will bottom, much depends on when the spread of new cases of COVID-19 decelerates, and when cities and states can restart their consumer and commercial economies. The greatest unknown right now is how many cases of the virus there actually are in the U.S., because many people are carrying the virus without knowing it, based on their lack of symptoms. Until the spread of the virus is more defined, it will be difficult for full re-openings of local, state and national economies. The good news is that the previous upward curve of new cases of the virus has begun to flatten. If that change sustains itself over the coming weeks, our economy will begin to re-open and improve.

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