Prof. Dr. Jan Viebig, Chief Investment Officer, ODDO BHF AM.
It seems that markets could be enjoying a breather after a rollercoaster ride in April. Recent statements from the White House have sounded a somewhat more careful note. While acknowledging that tariffs on Chinese imports are currently very high, President Trump said that they will not remain at the level long term, and that substantial reductions can be expected. And although he would like a more “active” monetary policy, he has no intention of firing Jerome Powell, the Chair of the Federal Reserve.But don’t count your chickens before they hatch, as the saying goes. Even if the administration backtracks somewhat on trade policy and refrains from meddling with the Fed, there are still significant risks for both the US and the world economy, as evidenced by the significant downward revision of the International Monetary Fund’s growth forecasts, among others. Political and economic uncertainties persist and are weighing on economic activity and financial markets. Investors in the US and abroad are wary. Donald Trump is known for his volatility and sudden mood swings. He will have a hard time rebuilding lost trust. Furthermore, the budget plans currently being negotiated by Congress and the looming expansion of the national debt also contribute to mounting risk.The Trump administration’s radical tariff policy has caused huge uncertainty in financial markets. Market participants previously expected US tariffs to rise from an average of just under 3 % to 14%. On 2 April 2025, Trump announced a massive increase of tariffs to a historically unprecedented level of 23% on average. This sent a shockwave across the financial markets. In light of this radical tariff policy, major American investment banks have significantly revised their price targets for the S&P 500 index to the end of 2025, as shown in Figure 1.Figure 1: Major US brokers’ revisions of S&P 500 forecasts at the end of 2025 in March vs April 2025
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Uncertainty will likely remain high as a result of Trump’s erratic economic policy. One of Warren Buffett’s most sensible nuggets of advice to investors is: “Be fearful when others are greedy and greedy when others are fearful.” For us, this means looking for investment opportunities at times of high volatility. We focus on shares of high-quality companies that, in our view, are trading below their intrinsic, fair value.
A useful indicator to judge the level of fear in markets is the Volatility Index (VIX) developed by the Chicago Board Options Exchange (CBOE). The VIX reflects the implied volatility of options on the S&P 500 index as a proxy for fear. The VIX has been calculated since the beginning of 1990. Its average level is 19.5 with a standard deviation of 7.8. In April 2025, volatility rose above 50, a statistically exceptional increase, as illustrated in Figure 2. The VIX has exceeded this level only on three occasions since 1990: during the 2008–9 financial crisis, the COVID-19 pandemic in 2020, and in April 2025 following Trump’s tariff announcement. Such high volatility reflects a high degree of fear among investors.
Figure 2: Implied volatility of the S&P 500 (VIX)
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In addition to high volatility, another indicator of fear in capital markets is a price decline of more than 10% over two days. In the case of the S&P 500, movements of this magnitude have occurred only a few times since the early 1950s: first in October 1987 (“Black Monday”), second during the financial crisis in November 2008, and third following the outbreak of the pandemic in March 2020. The sharp decline in early April 2025 triggered by Trump’s “Liberation Day” tariff announcement was thus anything but normal; we have identified only six corrections of this size in the past 75 years.
If, despite persistently weak markets, an investor had bought stocks on the second day of a correction of more than 10% over two days, they would have achieved above-average returns – in some cases far above average – over the next 12 months. The same applies to phases of extreme volatility (VIX > 50). Except for the early days of the financial crisis in October 2008, our calculations show that returns over the subsequent 12 months would have been consistently in the double digits, and in most cases in the high double digits. Figure 2 shows that the VIX rises above 30 relatively frequently. Of course, it is important not to forget that phases of high volatility in markets carry considerable risk. However, if our imaginary investor had systematically bought the S&P 500 on all days when the VIX exceeded 30, their expected return over the following 12 months would have been more than twice as high as the average for all 12-month periods since 1990, according to our calculations.
Generalisations should be approached with caution. Past performance is not a reliable indicator of future returns, and periods of extreme market turmoil carry significant risks. Furthermore, the performance of an investment over a 12-month period is not a perfect benchmark for our long-term investment horizon. For us, however, the return calculations discussed above strongly suggest that there is truth in Warren Buffett’s observation that long-term investors should buy stocks when other market participants are fearful. Indeed, we took advantage of the turbulence in April to make our first stock purchases. If the market corrects again and volatility spikes, we will take advantage of declining prices to buy shares of high-quality companies and hold them for the long term.
