Needless to say, 2018 hasn’t been as much of a walk in the park as 2017 was when it comes to making money.
The viability of the “Goldilocks” narrative underpinned the low vol. regime last year and intermittent flare ups on the geopolitical front (e.g., “fire and fury”) weren’t sufficient to shake investor confidence in risk assets. The “lake placid” market notched milestone after milestone, emboldening the Seth Goldens of the world, who re-engaged on the short vol. trade on every SPX dip – BTFD was running on auto-pilot and the central bank communication loop with markets created a scenario where investors were forced to either harvest carry or go out of business waiting for the tide to turn. As Deutsche Bank wrote earlier this year, that’s “not much of a choice, really.”
All of that changed rather abruptly in February and things haven’t been the same since. 1% moves in either direction have become more the norm than the exception and while the blowup of the Seth Golden crowd and the cascade of systematic de-risking the attendant VIX spike precipitated could plausibly be written off to a one-time technical hiccup, the ensuing turmoil around the trade war escalation and tech’s newfound regulatory woes suggest “we’re not in Kansas anymore” (so to speak).
So what, you might ask, has been the best performing asset class YTD considering the rather tumultuous ride we’ve had? Well, the short answer is commodities:
And as Goldman writes on Monday, “although commodities can have high volatility, they have also outperformed many assets in risk-adjusted terms”:
If you follow Goldman’s calls, you know this is good news for them. After all, on February 1, the bank was out saying they’re now “the most bullish in a decade” on commodities, and they’re sticking with that.
“With increasing inflationary risks, a positive carry in oil, the potential for oil supply disruptions in the Middle East, and their potential as a source of diversification, our commodities team thinks the current case for owning commodities has rarely been stronger,” the bank writes in the Monday note mentioned above, before reminding you that “historically commodities have outperformed in the late cycle, and have hedged inflation well.”
They do caution, however, that commodities’ YTD outperformance is mostly down to energy and on top of that, they warn that energy equities haven’t exactly kept up with crude. Here’s a simple chart that illustrates that latter point:
So place your bets, but do it wisely. Because again, the “how” may be as important as the “what” when it comes to these trades.