Insight: Market Volatility & Recession

Lightning Capital GP, Jock Percy, PhD-Economics, discusses recent market volatility and examines the driving forces behind the current environment. In such markets, he reminds us that patience and discipline are essential.

From the pandemic lock-down induced lows of March 2020 through January 3 of this year, the S&P 500 rose 120% (including dividends) without a single drawdown greater than 10%. In fact, this was a rare event where financial markets consistently moved up and to the right. It reminded me of the prototypical early stage ‘hockey-stick’ growth chart of so many young companies. It was as if nothing could get in the way of the intended growth, and if you didn’t agree with the projection, you simply didn’t get it.

The part that I didn’t get was how or why asset prices were sustainable at these levels given the inevitable inflationary effect caused by the combination of $Trillions in central government stimulus money, a.k.a. “M3” (directing cash to citizen accounts), AND supply chain disruption, AND labor constraints due to inadequate COVID testing that led to severe government controls of several sectors. AND, if that wasn’t enough to power up volatility, Russia followed through with their years-long threat of war and invaded Ukraine (again).

Now the reality of all of this has set in. We regularly see thousand-point swings in the Dow, and the S&P 500 is -18% so far this year, and BTC is -40%.

The question I most often get asked is: When will we see a bottom and when will this volatility go away? As much as we like for effects to have causes, volatility does not require a catalyst because it is endemic to financial markets. We believe that financial markets are reasonably efficient over time, but only as efficient as the participants that comprise them. To the degree that market participants are people, and human nature makes people susceptible to irrational bouts of FUD (fear, uncertainty and doubt), greed, envy, anxiety, and every other human emotion, such is also true for the markets. Markets trend toward an efficient reflection of value, but they always tend to overshoot on the upside and the downside. 

Disciplined investors can, and will, take advantage of these overshot emotions.

The search for reasons for the current spate of volatility is a target-rich environment. As we have discussed in various Lightning Capital webinars and updates, the only certainty today is uncertainty. Economic leadership is transitioning away from policy and back to the more fundamental driver of household spending. The future trend of inflation remains unclear, as is the Federal Reserve’s aggressiveness in tightening monetary policy to fight it. This is evident in the speculation that takes place around the Federal Reserve’s announcements and the parsing of every word issued by their Chair and Governors. 

Investors and markets hate uncertainty and prices reflect this. At a philosophical level, price is a wonderful concept. Prices are transparent: anyone with a smartphone can retrieve the price of a listed token at a moment’s notice. Furthermore, prices are updated continuously 24 hours a day, 7 days a week. The downside, as we’re seeing in the present, is that prices are volatile.

Unlike price, value has the opposite constructs: value is not transparent or easily calculable. It takes a lot of work to derive the fundamental value of a token, and different analysts will almost certainly disagree over intrinsic value. Unlike price, value is characterized by opacity, infrequent updates, and widespread disagreement. Value, however, is far more durable and stable than price.

It is for this reason that our Liquid Token Fund investment approach hinges on the identification of value, coupled with the patience to allow market volatility at the token level to provide an entry point at a discount to the intrinsic value of the token.

Let’s look at the fundamentals of the trailing 12-month Macroeconomic and Market Indicators to illustrate the potential disconnect between price and value at the macroeconomic level.


May 31, 2021

May 31, 2022


S&P 500 Index








Fed Funds Rate



x 25.6

2-Year Yield



x 16.0

10-Year Yield




CPI Inflation



x 2.27

Labor Force




Unemployment Rate




Real GDP at an Annual Rate




Source: On Chain Data, US Bureau of Labor Statistics, FRED St Louis Fed, Bloomberg

Data as of May 31, 2022

While the likelihood of a recession prevails, and the chances we are already in one with all of this volatility the news isn’t all Doomsday. The economy has restored almost 6.7 million jobs over the past year, bringing the unemployment rate down to 3.6%, which isa tenth of a percent off a 50-year low, and Real GDP is +3.6% over the past year. This is an indication that maybe things aren’t so bad after all.

Why would I throw in a positive statement such as this? Am I guilty of the economist's cliche, “on the one hand… but on the other hand…”? Well, not exactly. The behavioral science of markets, driven by a law of large numbers of humans, prone to FUD, greed, etc., makes volatility an everyday norm in financial markets and that includes Crypto. Further to my point, the rally in asset prices such as the 120% in the S&P 500 is not?.

Over the last 2 years I’ve been consistently asking the question: Where does an investor allocate in such a market? One of our Limited Partners recently remarked, “there is nowhere to hide right now”. Here are my thoughts and projections in researching the answer: 

  • Real estate prices are too high, while real yields are too low, and the cost of capital for venture and mortgages have tripled in many cases. Plus, ? is a lagging indicator and energy prices are linked to a kinetic conflict and likely to fall as recession demand does. 
  • Gold has lost its luster and is deficient in so many ways. The same can be said for most commodities as supply chain issues are resolved one way or another and recession demand takes effect. 
  • Treasuries/bonds/rates are not beating inflation, not even close.

So, this leaves us with equities and crypto. Now these are both risk assets subject to volatility and valuation to determine price. Equity prices are reflective of forward earnings and waning sentiment, and crypto is emergent and correlated.

It’s all about as clear as mud. If this is really the recession, then prior history should show that gold and bonds up, there would be equity carnage, and oil would be down closer to $40 a barrel. I’d also add the relative newcomer, bitcoin, to this list by saying a scarce, deflationary, and globally accepted asset should be up. So what to do?

Well, timing markets is a fool’s errand, unless you’ve figured out quantum physics and time travel through wormholes, and it can be very costly as market rebounds often unfold quickly. As I write this BTC has rebounded 3% in an hour and even with this year’s sell-off, the S&P 500 is still up 50% from the March 2020 lows. If an investor waited to see the market bottom in the rearview mirror and re-entered just a month later in April 2020, their return is only 20%. That first month of the rally makes a very big difference.

On the other hand, an investor can continue to stay invested and allow managers to exploit the disconnects that continue to arise between price and value. Make no mistake, staying the course is ‘not for the faint of heart’ as I am often quoted saying. Headlines instill panic and in order to sell clicks, and we are likely to be subjected to many more FUD-inducing headlines.

An employee once gave me a set of cufflinks as a birthday gift. He clearly put in some effort as they were silver, and hefty and had that special coating to keep them shiny and new, AND they were engraved. One cufflink said ‘Buy High’ and the other, ‘Sell Low’. He was either having a bit of fun, or genuinely got it backwards. The truth is that buying low and selling high feels uncomfortable. Investors risk feeling foolish selling high if the asset continues to rise, because they sold too early. Also, it’s uncomfortable when buying low, as investors run the risk that prices will continue to drop. If you have quality investment management, conviction and discipline then this discomfort will be offset by outperformance.