Max Fear, Meet Max Prices
A strange dynamic is emerging and it's bullish?
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There is a weird dynamic in markets right now, which is pretty rare historically.
The SPX is making new highs while the VIX is above 20.
The chart below shows historical all-time highs with their associated VIX levels.
Those SPX ~3500 ATHs were all in 2020, with the associated COVID uncertainty.
This dynamic is relatively unprecedented. During the COVID highs, it made sense—lots of stimulus was being pumped into the economy because of the uncertainty.
These days the uncertainty is surrounding the election and Middle East tensions.
Elevated VIX levels are typical of election years.
I’ve written about VAR (Value-At-Risk) shocks and VAR calculations before, but I’ll discuss them again briefly because there’s a relevant dynamic at play. Many large asset managers, including hedge funds, pension funds, etc., rely on VAR calls to determine asset allocations. VAR calcs will determine how much allocation these players are “allowed” to have to each asset class.
High VIX levels functionally limit investors' ability to get equity exposure. That means they are sidelining money in safer assets. When the VIX levels fall, the money can enter riskier assets.
Where will that money go, and and how should we best take advantage of it? Read to the end.
Soft Landing Intact
I wrote last week about the promising slate of economic data we've been receiving. Make sure you’ve read that article.
By all appearances, we are firmly in the Goldilocks zone. Growth is steady, inflation is falling, and economic data have bottomed.
Credit spreads, which had ticked up some in the summer months, are back making new lows.
S&P Earnings Growth is as strong as ever.
Below is a look at how various sectors of the economy have performed during previous soft landing episodes.
One thing stands out here. Financials have been a historical beneficiary of this situation, and we had several financial company earnings on Friday.
They were all exceptionally strong, and their underlying stocks did well. Is it time to buy some of these other sectors? Charts below.
CPI, PPI, and Inflation
Last week’s economic data focused on inflation. The CPI came in slightly higher than expected, with the core actually ticking up.
PPI came in slightly lower than expected across the board.
Still, the trend for both is down overall.
In my view, these are encouraging numbers. Inflation is low and near sustainable levels.
However, the risk is also clearly to the upside. Resurging inflation would be horrible news for risk assets. And there is certainly a chance of that, even if we aren’t really seeing it in the data yet.
For that reason, inflation prints will likely remain high-volatility events for the foreseeable future.
Our Week Behind and Ahead
We got an uptick in jobless claims last week, likely attributable to the hurricanes, but that means more focus will be on Wednesday’s jobless claims this week.
The tactical portfolio had another great week last week, with the bond shorts outperforming and some of our tactical equity moves providing strong performance as well.
Make sure you’re in the chat to get those calls in real-time.
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