Something May Be Happening

In a world of nothing ever happens I found within myself an invincible "something may be happening"

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For the last few years, investors have been conditioned to trade off the “nothing ever happens” thesis, which states that nothing ever happens.

Unfortunately for those of us who were long equities instead of long vol, that regime has been massively upended.

Trump’s outsized tariffs resulted in a bona fide market shock that saw the S&P 500 fall 15% in just three trading days.

That fall was partially erased after the Trump Put was struck (probably by price action in bonds, not in equities), Trump paused tariffs 90 days, and the S&P 500 rallied 10% intraday.

David Cervantes

’ excellent article, out today, does a great job of breaking down the situation and contextualizing it as a vol event.

Market Commentary

You should read it (and sub to his excellent substack), but I will pull out a few key insights for us to discuss:

• Vol events tend to cluster (“there’s never just one cockroach”), and 4-sigma events like the one we had tend to imply more pain in store.

• This is a Trump-driven event, meaning only Trump can unwind it.

• Periods of heightened volatility tend also to be periods of negative returns. The exceptions are where there is a significant policy response.

I’m going to tie this into the economic formula I mentioned last weekend:

Will tariffs and uncertainty ease faster than financial conditions deteriorate?

If yes = bullish

If no = bearish

Building on that, we know that in order to resume an uptrend, we need Trump to pivot (the only credible source of uncertainty easing) faster than the economic picture deteriorates.

Source: Stole this idea from Shrub

This lends to a sort of “theta decay” on the market where we drift downwards without positive catalysts.

The Status of the Trump Pivot