Fear Is Creeping Into the Stock Market
Oct 7th 2013 3:45PM
Updated Oct 7th 2013 3:46PM
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
We're nearly a full week into the government shutdown, and a debate that Wall Street ignored for all of September has finally gotten everyone's attention. Since the beginning of trading last week, the Dow Jones Industrial Average has fallen 1.7%, and today's steady declines continued as the index fell 0.5% late in trading.
That's not a huge drop in the grand scheme of things, but we can see signs that traders are starting to get nervous. One big indicator is that the CBOE Volatility Index jumped 10.5% today. The VIX is known as the "fear index" because it measures what investors expect the volatility of the market to be in the future.
You can see below that the VIX is still relatively low in historical terms, but it's on the rise. The VIX hit a historical peak in late 2008 when the financial crisis hit and another high in 2011 when the last debt-ceiling debate was taking place. The VIX shot higher as the debt ceiling approached and remained high for months after the debate was over.
Why should you care about the VIX? The index can give you an idea how traders and businesses are looking at the market as a whole. The higher the VIX is the higher the level of fear in the market. There are real consequences to the government shutdown and devastating consequences -- including higher interest rates and lower growth -- if the U.S. defaults on its debt. This is just one way to see how financial markets are viewing the risks involved.
Credit card companies feeling the brunt today
The government shutdown as already cost the country 0.1% point of economic growth, about $15 billion in economic activity, Bloomberg estimates. That may be why American Express and Visa are two of the Dow's worst performers today, respectively falling 1.4% and 1.7%.
Both American Express and Visa rely on increasing consumer and business transactions to grow, so any fear emanating from the shutdown or potential default will be felt on their bottom lines. Consumers clearly cut back spending in 2008 and 2009 when the VIX was high and there was a short blip in GDP growth again in 2011 leading up to the debt ceiling debate and higher VIX. The good news for long-term investors is that a cutback in spending will be short-lived if a deal is reached in Washington, which means this is a buying opportunity for investors willing to ride out the wave.
Stocks that will win when the fear is over
The stock market will often drop when fear or uncertainty are high, but that provides an opportunity for investors. Many global regions have yet to experience strong growth coming out of the financial crisis but as they get their economies in better position their resurgence could result in windfall profits for select companies, especially when you can buy low. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!
The article Fear Is Creeping Into the Stock Market originally appeared on Fool.com.Fool contributor Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends American Express and Visa. The Motley Fool owns shares of Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.