Could the volatility pose an opportunity for investors?
Risk-on assets including stocks and Bitcoin continued their slide on Monday, with several major indices registering losses, and the CBOE Volatility Index (VIX) hitting its highest level since the COVID-19 pandemic.
In a continuation of last week’s multi-sector rout, the VIX, or “fear gauge”, briefly jumped to 65. Typically, the VIX tends to hover at around 15, plus or minus five, and generally moves in the opposite direction of the stock market.
Indeed, the S&P 500 (SPX), NASDAQ (NDX) and Dow Jones Industrial Average (DJIA) all fell more than 2% on Monday, with the tech-heavy NASDAQ leading the way down. The Russell 2000 (RUT) small-cap index dropped more than 3%.
Meanwhile, Bitcoin tumbled 12% to $50,000 briefly on Monday morning before retracing to $54,500. This follows Bitcoin’s worst week since November of 2022, when the collapse of Sam Bankman-Fried’s failed FTX cryptocurrency exchange rattled the digital-asset community.
Bond yields and Bitcoin slide with stocks
Currently, the bond market, generally thought of as a bellwether for the stock market, is predicting a near-term Federal Reserve “pivot” from holding the federal funds rate steady to commencing long-awaited rate cuts.
U.S. government bonds continued their selloff in anticipation of interest rate cuts starting in September. The 10-year Treasury yield sank below 3.8% on Monday. Bond prices, which move inversely to yields, moved higher.
Oddsmakers are pricing in a near 100% probability that the Federal Reserve will cut its benchmark interest rate by 0.5% by the September Federal Open Market Committee (FOMC) meeting. In most cases, whatever the oddsmakers predict the Federal Reserve will do in the immediate term, is typically what actually happens.
Japan’s central bank does the unexpected
It certainly didn’t help the risk-on asset bulls when the Bank of Japan (BoJ) recently and unexpectedly raised its benchmark interest rate for only the second time in 17 years. However, this isn’t a huge act of tightening, with the BoJ raising its benchmark interest rate from 0.1% to a still very low 0.25%.
The BoJ’s interest rate hike isn’t likely to cause a global contagion of monetary policy tightening. As mentioned earlier, oddsmakers still expect the Federal Reserve to commence interest rate cuts soon, starting with a 0.5% cut instead of just the usual 0.25% cut.
Still, U.S. investors should watch what’s happening in Japan. Bear in mind that some Japanese traders borrowed money at a near-zero interest rate in order to buy various assets. Those trades might unwind if the BoJ continues to raise interest rates, with potential ripple effects for Japanese stock indexes.
Can volatility bring opportunity?
However, there may be opportunities for stocks and bitcoin investors in this volatile environment, with the “fear gauge” acting as a guide.
Note that the VIX rarely goes above 40 or even 30. When it does, it generally doesn’t stay there for very long, so it may be a good time to pursue some small share purchases.
If any index is due a catch-up, it’s the Russell 2000. For the past year and a half, investors have hastily pulled money out of small-cap stocks in order to pile into ostensibly safer Magnificent Seven mega-cap tech names.
If you must buy a large-cap technology stock, consider Intel (NASDAQ:INTC). Despite a disappointing second-quarter earnings report, a disclosure of upcoming layoffs, and a fourth-quarter 2024 dividend suspension announcement, Intel will continue to benefit from the CHIPS Act and looks likely to become an important chip-foundry business.
Moreover, cryptocurrency enthusiasts should think about dipping into Bitcoin at this price. Just remember that Bitcoin is volatile, so either plan to hold for the long term or have an exit plan, such as a stop-loss sell price.
Finally, there’s no need to load up on your watch-list stocks all at once. The idea is to scale into one’s positions gradually, since the broad-market selloff could persist for a while longer. After all, it’s not your job to try and time the “bottom” of the price move. It’s better to get in, build your position slowly and, most of all, be patient and resistant to the crowd’s fear and panic.
