The stock market is a wonderful place to grow your wealth if you are investing for the long term. However, it can be a very vicious place in times of increased economic uncertainty with the world reacting to the USA’s tariff announcements and consumers boycotting American products and vacations. The U.S. consumer is also reacting to the uncertainty and concern over growing inflation by reducing spending.  It is fair to say that the corporate sector has put capital spending on hold. Thus far, Trump’s bark is more fearful than his bite. Canada was threatened with tariffs that would have set industry back decades, but when the actual policy was released, it left access to the U.S. market largely unchanged. While tariffs on steel, aluminum and completed automobiles remain, I suspect these will be repealed as well.

We had the pleasure and opportunity of meeting with the management of Linamar, a company we own in our Global Equity Growth Fund, on Thursday. Management stated that all their products can enter the U.S. tax free under the continuance of the USMCA free trade agreement. They also pointed out that completed automobiles continue to cross the border unhindered. Linamar stock had sold off massively on the potential impact of Trump’s tariffs. It turns out there are none, but the stock has not recovered as fears are now turning to a combination of recession and inflation. We view this weakness as a classic value opportunity to purchase the stock.

One of the best indicators of markets bottoming is the spiking of the S&P 500’s volatility index, (known as the VIX). Figure 1 below tracks the VIX (the black line) since its inception on Jan. 2, 1990, and the S&P 500 Index (the blue line). As you can see, the height of the recent spike is exceeded only by the peaks experienced during the Great Financial Crisis in 2008 and the start of the Covid lockdowns in 2020. Both coincide with market bottoms.

Figure 1. VIX spikes historically indicate a market bottom 

Panic Selling at the bottom

The two most challenging times in my career were the inflation crisis of 1982 and the financial crisis of 2008. Figure 2 below shows the performance of the S&P 500 through 1982 and into March of 1983.

The inflation crisis of 1982 provided a lesson early in my career as to the consequences of panic selling…..one that has stuck with me to this day. In 1982, computer technology was still emerging and the VIX was not yet available as a measure of volatility. At the time, I was working in the investment department of a major insurance company. Paul Volcker, the US Federal Reserve Bank Chairman, raised the fed funds rate to 20% in June 1980 to break the back of inflation, which peaked at 14.8% in March.  A recession followed, and stock markets collapsed through 1981 and into 1982. My boss at the time decided we had to sell and go to 50% cash. We got there in late July of 1982. The market bottomed two weeks later and then rose 50% in the next 6 months. As a result, we all lost our jobs as the company outsourced the management of its investments a year later.

Figure 2. A lesson in panic selling

Let’s now examine the two most significant VIX spikes since its inception and what we can learn from them and their relevance to the current environment.

The 2008 Spike: Figure 3 below presents the S&P 500 (the blue line) and the VIX (the black line) during the Financial Crisis of 2008, when the collapse of the speculative housing bubble could have led to the collapse of the U.S. banking system and that of several other countries. I expect this will be the biggest crisis I will have witnessed in my life. The VIX spiked to over 80 as Hank Paulson, the Secretary of the Treasury, had the guts and wherewithal to force the banking system to rescue the investment banks at the centre of the bad mortgage loan crisis. For example, JP Morgan absorbed Bear Stearns and WaMu, Bank of America was forced to buy Merril Lynch and Warren Buffet provided liquidity to Goldman Sachs and Morgan Stanley. As you can see in Figure 3 below, the peak of the selloff was over in March 2009 and once the VIX had settled down into the forties (still indicating a lot of fear), the market returned to its usual upward grind as company managements adjusted and began to grow their companies again. Markets returned approximately 20% between October 2008 to October 2009.

Figure 3. Markets returned approximately 20% following initial VIX spike in 2008 

The 2020 Spike: Figure 4 below illustrates what happened during the Covid shutdown, when the market (the blue line) collapsed 35% in a month and the VIX (the black line) soared due to fear of the potential consequences. Quick worldwide government stimulation revived the global economies and the market recovered and moved higher (Figure 4). While by late 2022, fear shifted to inflation, which led to higher interest rates and a one year 20% decline in the markets, the decline was recovered as the economy once again took off.

Figure 4. Covid sell-off, while vicious, was quickly recovered as business confidence improved 

The 2025 Spike: Let us now look at the most recent spike in the VIX (see Figure 5 below), which began with “Liberation Day,” or maybe better named “Destruction Day,” Wednesday, April 2nd, and the negative reaction it sparked in global markets. The VIX (black line) continued to rise the subsequent Thursday and Friday, closing at 45, and finally peaked last Tuesday, April 8th, at 52. Trump significantly relented on tariffs the next day, sparking a major 9.5% rally in the index (the blue line) and a 35% decline in the VIX to a still high level of 33. The VIX bounced back on Thursday to 40.72, up 21%, and we lost a third of Wednesday’s gain. Friday, the market closed 1.9% higher and the VIX settled back to 37.6 as a sense that the worst on tariffs was behind us crept across the market. Trump’s announcement on Saturday freeing tariffs on electronic product will relieve pressure on Apple and perhaps spur a rally across the market. The VIX should drop towards 30, still high but continuing a positive trend.

Figure 5. We expect the VIX to moderate in the coming weeks, which should lead to higher markets in second half of 2025