TMCnet Feature
November 02, 2020

Jasdeep Singh sees significant volatility ahead for markets as risks mount

Business consultant Jasdeep Singh
thinks that financial markets are facing a crossroad at the moment as multiple risks loom in the backdrop while the outlook for corporate earnings remains bleak.

In this regard, Singh seems to think that the recent volatility surge seen on October 26 could be the tip of the iceberg as markets weigh the risks associated with a resurgence of the virus in key developed countries, along with the possibility of a contested election in the United States.

Although a temporary risk-off move was probably expected by market participants, it is also plausible that investors could be walking away from risky assets amid sky-high valuations seen in certain firms – especially within the tech space – with a potential situation of “who goes first” taking place.

What this means is that market players held their positions as long as they expected further stimulus from Congress to push valuations higher. Given that talks are still stalled and a deal seems unlikely before the election, now could be a good time to take some profits off the table and have the possibility of re-entering the market once things have cooled off.

The VIX breaks consolidation while the S&P 500 retests important supports

Dr. Singh, who holds an MBA from the University of Connecticut, highlights how the S&P 500 index has fallen off a bearish rising wedge pattern lately while resting a key support level – the index’s 3,400 pre-pandemic all-time high.

This is a key level to watch as market participants could be weighing whether the current situation reflects an improvement that justifies the levels seen previously, or if the multiple risks that currently loom in the backdrop are just too high and could trigger a short-term correction.

Next in line, in case market participants decide it is time for a risk-off move, would be the 3,200 level – possibly the last line of defense before a full-blown reversion to the mean.

Although this does not constitute a forecast, Singh emphasized that the recent move seen in the CBOE S&P 500 Volatility Index – also known as the VIX – could be providing confirmation that a big risk-off move is coming.

In this regard, Dr. Singh highlights, VIX has broken above the range-bound trading levels it had been confined within lately. The index rose as much as 17% on October 26 as market players saw significant volatility ahead for the broad-market index.

These expectations are built upon the multiple risks that are currently looming in the backdrop, such as a resurgence of the virus – and the corresponding implementation of lockdowns – in key European countries including Germany, France, and the United Kingdom, the US election, and soft Q3 earnings.

Moreover, there’s also the presence of sky-high valuations prompted by the trillions of dollars injected by the Federal Reserve to contain the financial fallout of the virus. The move has undoubtedly distorted market valuations via an artificial increase in stock buybacks from well-capitalized companies, such as those in big tech.

Singh further highlights that a prolonged downturn in the United States and overseas, with the US already heading to its third wave, is causing investors to rethink their assumptions as to how quickly the economy will recover. The longer the crisis runs, the deeper the effects on the economy will be, and thus the more difficult a recovery will become.

Market volatility is likely to remain the norm for the next few months

Dr. Singh finalizes his remarks by saying that given this negative backdrop, it is very difficult to see corporate earnings rising to the levels seen before the pandemic any time soon.

At this point, investors should concentrate on hedging their positions to prevent a sustained deterioration in the market value of their portfolios should a strong downturn come while also taking profits from any ‘stretched’ or possible over-valued positions.

Corporate earnings, any further actions from central banks around the world, vaccine developments, consumer confidence, and small and mid-cap company sustainability are the key drivers to keep an eye on as they will end up determining where things may go in the coming months or even years.

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