Displaying items by tag: volatility

(New York)

The market fell another 4% yesterday, pushing all the major indices into a correction, meaning a 10% drop or more. However, the reality is that this really isn’t much of a correction, at least yet. Looking at a number of the most common valuation metrics, such as P/E, CAPE, dividend yields etc, stocks are still very expensive. Even considering this fall, they are still up 19% over the last year. That means it would take much a more substantial fall to push them into the territory where they could be a buy on a “value” basis.

FINSUM: A few thoughts here. Firstly, stocks are only a buy right now if you think the market is taking a break before heading higher. Well, that is our view. The market is all concerned that growth is too good, which through some mechanisms (like the Fed) will lead to a recession. In early 2016 (the last time a correction happened), the market was worried about a dismal economy. That time the fears were wrong, and we think they will be this time too. This has been a middle of the road recovery for almost a decade, and we think it will revert to that mean, avoiding investors’ worst nightmare—growth! (as if that is such a nightmare).

(New York)

The VIX is the predominant measure of volatility. Everyone keeps and eye on it, and everyone trades it. Over the last couple of years many have made great money shorting it. However, the focus on it has now led the index to outgrow itself, says its founder. Now, we have a case of the tail wagging the dog, where instead of the VIX measuring market volatility, the market is watching the VIX, which itself incites volatility. In his own words, VIX founder Sandy Rattray, formerly of Goldman Sachs and now with Man Group, says “The Vix has moved from being a measure of something to being something that influences this thing it is trying to observe”.

FINSUM: Observing the VIX has turned into an obsession to the point where it creates a self-fulfilling prophecy. This is quite similar to the case of technical traders who are all observing the same measure and then all act at the same time, creating the reality they predict.

(New York)
One of the most respected financial publications in the country has some bad news for investors: the selloff is not over yet. Barron’s argues that the selloff is not close to over, despite the mild recovery, because investors are not yet use to the new “yield backdrop”. For the first time in over a decade, the market seems to be pricing in higher rates and a tighter monetary environment. “The going bet, now, is that the Federal Reserve will continue to lift rates, and thus tighten credit, and maybe to a degree that produces an economic recession”.

FINSUM: We think more volatility is on the way and that it will take a little time for the storm clouds to clear, but we do not expect a bear market, or much more than a 10% overall correction.

(New York)

For most of the day the stock market was in positive territory yesterday. However, right at the close, the market was gripped by a swift selloff that pushed it into the red for the day. If the saying holds true—that smart money trades the close—then today could be an ugly one. The drop at the end seemed to foretell more volatility to come, and show that the market has not psychologically recovered from Monday. The market may remain directionless until next Wednesday, when new inflation data comes out. Investors are worried about the prospect of stronger inflation, and thus a quick rate rise.

FINSUM: The markets are trying to find a new baseline for valuations as investors search for a new narrative of where shares are heading. The US economic picture is strong, but there is no tax cut or other major carrot being dangled, which seems to be hurting prices.

(New York)

One of the Financial Times’ most respected columnists has just published an article making a grim comparison. Saying that he dreads even mentioning it, John Authers argues that the current state of markets and the context of the losses are very similar to the summer of 2007, or the eve of the Financial Crisis. In particular, just like then, stocks moved higher even as bond yields did, all until a yield threshold is broken, when stocks finally panic. Then, even though fixed income started the worries, equity investors flee into the safety of bonds. The important extension of the argument is that all the associated fallout will not occur this time, as the economy is stronger and more balanced.

FINSUM: So this is only a half comparison. The actual market event may be similar, but the condition of the economy, and its link to markets is very different, and almost inarguably better this time around.