Displaying items by tag: bear market

(New York)

Whenever serious volatility strikes, investors get very nervous and don’t know how to react. One of the big questions is should I stay in the market? The other is which assets should I buy? Surprisingly, there is a fairly simple solution to handle volatility: every time the market moves wildly, hedge your portfolio with cash and/or options. When the markets calm down, unwind the hedge. Returns on stocks have actually been historically strongest during periods of low volatility (not the opposite).

FINSUM: The most interesting aspect here is that studies show that market returns have been highest in low volatility periods. Many people think that you have to stay in the market during volatile periods to make great returns, but that is simply not the case.

(New York)

Economic data this year has mostly surprised to the upside. However, recently, things have started to disappoint. For instance, Citigroup’s basket of economic indicators has fallen to its lowest level since the Financial Crisis. Even the Atlanta Fed is bearish, recently forecasting GDP at 1.6%. Bond King Jeffrey Gundlach agrees, saying he believes the odds of a recession in the next 24 months are “very high”. He believes the chances of a recession within 12 months are 50-50.

FINSUM: We think Citi’s indicator is definitely overstating the situation. However, there are legitimate concerns about the economy, especially if you start to consider the possible implications of a trade war.

(New York)

Yesterday was an ugly reminder of the fourth quarter. The Nasdaq fell 3.4%, its worst decline since December 4th. The S&P 500 wasn’t much better. The big falls came on the announcement that Trump was considering raising tariffs on a further $300 bn of Chinese imports following the failure of negotiations last week. Investors are anxious that the trade war may continue to escalate and impact the global economy. One economist summarized the situation this way, saying “The confrontation has now escalated to a battle of testosterone between two leaders who believe they have much to prove to their constituents. But the longer this exhibition of chest-beating lasts, the greater the odds of a US, if not global, recession”.

FINSUM: Though recently we have been more placid, a couple of months ago we were worried that a deal might be hard to complete because of how much China has on the line politically. The country’s unelected leaders need to keep their people happy, which means the stakes are incredibly high for them.

(New York)

What is the biggest threat to the bull market? Is it a recession, high valuations, interest rate volatility? In reality, the biggest threat to the bull market might be rearing its ugly head now—a trade war. Trade tensions between the US and China have skyrocketed again this week and it has investors worried that there could be a global slowdown in trading which would sink the economy. In fact, that is the point that some don’t understand—it is not just about whether the US and China close a deal in the near term, it is about how the trade tensions the US and China create percolate through the global economy. Astute market watchers will have noticed new data out of China shows that exports have dropped, a sign of potential weakening.

FINSUM: We think cooler heads will prevail and the US and China will get a deal done. Our expectation is that it will not be ground-breaking in scope, but that it will be enough so that both countries can claim victory and investors can happily put these tensions in the rear view mirror.

(New York)

For the last eight weeks or so we have been running a “recession watch” theme in articles, but the data is lately looking so good that we are feeling silly. New GDP data was released today and it was nothing short of a blowout. The US expanded 3.2% in the first quarter despite a government shutdown and winter weather. The growth was almost a full percentage point ahead of expectations and well beyond the 2.2% growth of the fourth quarter.

FINSUM: These recession fears seem pretty well put to bed in our opinion. Back in Q4, the declines in a number of indicators seemed to show we may be headed for a recession, but the strong reversal in data suggests this was just an aberration. The market doesn’t seem convinced, though, as Treasuries rallied on this news!