Happy Friday!
Volatility Part Deux: Volatility spikes create short-term stress, but historically provide long-term opportunities. Lahaina’s Banyan Tree rises from the ashes. Sea Otters – not just adorable sea creatures.
#1 – Weekly Market Recap
What a week! Volatility reached a three-year high on Monday following what is known as the “unwind of the Yen carry trade” and disappointing employment data. The result was the largest single-day decline since September 2022. Tuesday and Wednesday sessions saw investors buy stocks, only to see the intra-day rallies fall apart in the afternoon.
Fortunately, the week appears to be ending on a more positive tone as Thursday’s stronger than expected job claims data helped alleviate investors’ concerns about a weakening labor market. Ultimately, the heightened volatility led to all three major indices down less than a percent through Thursday’s close, the Nasdaq declined slightly by -0.1%, while the S&P 500 and Dow Jones were down by -0.5% and -0.7%, respectively. This morning the markets appear to be digesting the week’s volatility and are neither up nor down significantly.
#2 – Historical Volatility: Stress and Opportunities
The “VIX” Volatility Index, or what is also known as the “fear index,”, rose significantly this week. Last Friday, the VIX closed at 23. It almost tripled to a high of 65 on Monday morning. However, this morning the VIX fell back to 23. During the week, the S&P 500 had its largest one-day selloff — and then its largest one-day rally — over the past 2 years. Now that’s volatility!
Investors may be wondering how the stock market historically performs following volatility spikes. We analyzed data going back to 1990 and found 89 days when the VIX rose above 30. The table below shows S&P 500 performance for the month leading into the volatility spike, the S&P 500’s return on the day of the spike, and the S&P 500 performance in the ensuing week, month, quarter, half-year, and year after the spike.
The data informs investors of a few key points:
- Historically, volatility spikes are overwhelmingly negative the day of the spike. The S&P 500 was negative 97% of the time the VIX rose above 30.
- Historically, volatility spikes occur after a period of weakness. The S&P 500 was positive just 34% of the time in the month leading up to VIX spikes, with a median loss of -2.2%.
- Historically, volatility spikes create a greater likelihood of positive forward returns. Across all timeframes, the percentage of positive S&P 500 future returns after the VIX rose above 30 was higher than overall median returns.
Given this context, it may be helpful to know that while volatility spikes create short-term stress, they historically have provided long-term opportunities.
#3 – Lahaina’s Banyan Tree Rises from the Ashes
For over 150 years, the enormous banyan tree along Lahaina’s Front Street provided a shaded gathering place for generations of Hawaiian residents and tourists.
Last August, when a deadly wildfire tore through historic Lahaina on Maui, the wall of flames decimated much of the town and scorched the enormous tree. The fire charred the tree and blackened many of its leaves. However, according to Duane Sparkman, chair of the Maui County Arborist Committee, it was the intense heat that caused the most damage to the tree. As a result of the loss of moisture, about half of the tree’s branches died.
Amazingly the 150 year-old tree survived the blaze, and thanks to the efforts of dedicated arborists and volunteers, parts of the tree are growing back and thriving. Those working to save the tree removed the dead branches so the tree’s energy could go toward the branches that were alive. As the tree has been treated, it is getting stronger and stronger said Sparkman.
“You see a lot of long, long branches with hundreds of leaves back on the tree,” Sparkman said, adding that some branches are even producing fruit. “It’s pretty amazing to see that much of the tree come back.”
Lahaina’s banyan tree is the oldest living specimen on Maui. The sprawling tree stood more than 60 feet high and is anchored by multiple trunks that span nearly an acre. Aerial roots dangle from the boughs eventually latching onto the soil to become new trunks.
The banyan is not indigenous to the Hawaiian Islands. The tree was a gift from India to commemorate the 50th anniversary of the arrival of the first Protestant mission in Lahaina. The 8-foot sapling was planted in 1873, a quarter of a century before Hawaii became a US territory, and 70 years after King Kamehameha declared Lahaina the capital of his Hawaiian Kingdom.
It’s estimated that Lahaina lost roughly 25,000 trees in the fire, including the culturally important ulu or breadfruit tree. To help restore Lahaina’s trees, Sparkman founded a nonprofit called Treecovery. The group has potted some 3,500 trees so far, growing them in “micro-nurseries” across the island until people can move back into their homes.
Source: AP News
#4 – Sea Otter Resurgence
Sea otters aren’t just adorable aquatic animals, they also play a critical role in preserving the environment.
The sea otter’s hunting prowess makes them a keystone species, which means that other aspects of the ecosystem rely on their existence. The aquatic animals hunt invertebrates like clams and kelp-eating sea urchins. Sea otters have had a positive impact on keeping the kelp forests healthy along the California coast. Without them, many species that live in the kelp forests would not survive.
The sea otter has faced numerous threats from humans including hunting, oil spills and commercial fishing. The sea otter has the densest fur of any animal, which made it a target for hunters during the 18th and 19th centuries. By the early 20th century, the sea otter population fell below 2,000 and faced extinction. A 1911 treaty banning sea otter hunting, and other conservation initiatives, has enabled the population to bounce back to approximately 130,000 sea otters worldwide.
Historically, sea otters could be found from Japan to the coast of Mexico. Today they are mainly found in the North Pacific Ocean, from California to Alaska, as well as parts of eastern Russia. Conservation efforts include reintroducing otters to their former habitats.
In the 1980s, the US Fish & Wildlife Service (FWS) moved 140 otters from the central California cost to San Nicolas Island, 61 miles from the mainland, to increase the otter’s range. There is now a small but stable sea otter population in the area according to FWS. Similarly, in the 1970s 59 Alaskan sea otters were released to Washington’s Olympic Peninsula where the species had gone nearly extinct.
While the sea otter population has rebounded, according to the IUCN Red List Threatened Species, it is still considered an endangered species.
Source: CNN
Source: Red List
Have a great weekend!
Denver & the DSG Capital Advisors Team