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The answer to "What's going to give the Fear Index a boost ?" was staring us in the face all along .... The threat of Thermonuclear War,...

August 11, 2017

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Time to get our thoughts in order ? Fat chance .......

March 28, 2018

 

ref :- General

Of all the prognostications for the year ahead made at the start of 2018  the one that inspired most confidence was that if nothing else, this year was going to be a fair bit more volatile than the recent past. Of course, at the most obvious level that would make things trickier for stock market investors in particular, used to what has seemed like an unbroken upward path in prices accompanied by an ability to shrug off events that in previous times would have provoked some serious jitters. Decent growth,  healthy corporate earnings and plans for fiscal stimulus have sustained the long bull run, but it was an ultra-low interest rate policy and massive additions of liquidity from the central bank that helped to kick it all off, and in large part fostered the era of low volatility.

Long-term bulls would point out that there have been other downturns in the nine-year bull market, and in fact the correction since early February SO FAR would rank as only the second shortest and second mildest of the five recorded. Short-term traders might still take that as encouragement to sell, but the long-term bulls would say that the bull market can withstand much worse than this, and be looking for more buying opportunities.

What's undeniable is that predictions for higher volatility have certainly come to pass. The current reading on the VIX (a measure of volatility derived from option prices on the S&P Index) at around 23 may not be wildly higher than its long-term average of around 20, but it does indicate that markets are in a different place than that inhabited for most of 2017, when in spite of plenty of provocation the VIX languished above and below 10.

There are plenty of reasons why volatility should have risen, and in and of itself the rise is not such a terrible thing (the period of suppressed volatility was the stranger phenomenon of the two). As the economic cycle matures, and growth and employment measures continue to show strength, one could only expect the Fed to raise short-term rates further in the expectation of inflation, and bond yields to rise (and prices fall) for the same reason. After such a long period of easy money both at the short end and the long end of the yield curve, such a development was bound to give investors a reason to at least consider caution where previously there was none. 

That's all well and good, but in the event it's been geopolitics and developments outside the remit of central banks that have been stirring things up of late, and these things are much less predictable. There's an argument for saying that any wise investor should expect the unexpected when President Trump's around, but to be fair he would say that he's only pursuing policy that he's always espoused, and very publicly so too. Nevertheless, that hasn't made things any easier to forecast, and it's not really any easier to predict what the market effects of any particular development might be bearing in mind how quickly the picture changes.

Take the trade issue ..... at the end of last week, the question on everybody's lips was "where will this all end ?". China had announced a comparatively restrained response to the steel and aluminium tariffs imposed by President Trump, and the fact that he was exempting allies from the tariffs suggested that China was the specific target and that any trade dispute might be limited in geographical scope. He then instructed Treasury Sec. Stephen Mnuchin to draw up further penalties on at least $50 billion of goods imported from China, restrictions of Chinese investment in US companies (particularly in the technology sector), and a demand for China to reduce the US' bilateral trade deficit by $100 billion. Cue : a stock market sell-off.

Mr Mnuchin then goes on Fox TV on Sunday (where else ?), and states that he is cautiously optimistic that a deal can be struck with China.  Ah .... so maybe this is all a negotiating ploy, one that Mr Trump is famous for and bragged about in "The Art of the Deal"  --  effectively, ask for the moon and the opposition will be happy to settle for something less. Cue : stock market rally on Monday.

Technology stocks (FAANG etc) are now so huge that they will lead any index that doesn't exclude them, not just the NASDAQ. Technologies are at the forefront of the China stand-off of course but currently have problems of their own above and beyond any US / China trade spats  --  namely the Facebook fiasco and the possibility of increased supervision and regulation on the whole industry. Cue : stock market sell-off on Tuesday.

Other markets can also give us a clue towards anxiety levels : safe-havens like gold and the Japanese Yen have increased (and decreased) in value in tandem with geopolitical tension, and Government Bond yields, especially those of US Treasury Bonds, have fallen as investors once more decide that the security to be had in those instruments is genuinely attractive at times such as this. It seems just the other day that some were telling us that fiscal stimulus and continued strong growth, and the resulting inflationary pressure, was forcing the yield on 10yr US Treasuries to test 3.00%, and the inevitable break of that technically highly significant level opens the way to much higher yields. Maybe .... but not yet. 10yr yields are currently trading at just under 2.76%.

Frankly, our guess as to how this will ultimately pan out is no more informed than anyone else's ..... but actually that's the point. That's why so many market commentators like to talk about volatility and stand back from giving directional views. We know that when valuations are high and liquidity is tighter than the market is used to, investors' nerves are likely to be a little less steely than they have been. You can also throw in unpredictable geopolitical events (and personalities), and the market's rediscovered tendency to overreact (in both directions). That's a pretty good recipe for volatility, so even if investors are not tempted to change their views, they'd do well to prepare for a bumpy ride.

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