credit Markets stocks

Bipolar, Bimodal.

“There’s been a lot of healing, and that’s what the market is reflecting, but there’s still a great component of our economy that hasn’t healed and is still struggling”, Larry Fink said Friday, during an interview with Bloomberg.

Ostensibly, Fink is concerned about a two-speed recovery, and based on comments delivered to CNBC, he’s worried that a generalized reluctance for the country to come together on critical public health issues will ultimately impede progress by making it impossible for the US to flatten the virus curve.

“For our economy to be fully operational again it can’t be this bipolar economy”, Fink told Bloomberg, referencing small- and mid-sized businesses which may have fallen behind, in part because they haven’t benefited to the same extent as larger firms from government assistance and the Fed’s myriad liquidity backstops.


Fink is correct, of course, but for now, equities are still loath to selloff in earnest despite evidencing trepidation lately as rising COVID caseloads force a steady rollback of the re-opening push across the country, mostly to the detriment of smaller businesses and their employees.

Stocks rose for third week in the US, and in a break with precedent, big-cap tech looks to have underperformed the S&P by one of the widest weekly margins since the financial crisis.

Tech has outperformed handily in the wake of the pandemic for a laundry list of well-documented reasons, but a cacophony of bubble calls, stretched valuations, and, quite possibly, plain exhaustion appear to be catching up to the Nasdaq.

Netflix suffered through one of its worst five sessions since the October 2018 tech selloff after delivering a disappointing forecast for subscriber and revenue growth, perhaps presaging what’s coming when other tech behemoths report results in the weeks ahead.

The spread between the Nasdaq’s fear gauge and the VIX has come off a bit, but is still elevated.

So far in 2020, credit, gold, tech, and healthcare are the flows winners. Well, besides cash, which is still in a league of its own despite massive outflows last week tied to the tax deadline in the US.

Tech inflows hit a record over the past two weeks (cumulatively).

Lipper data shows investment grade credit took in another $4.5 billion in the last weekly reporting period. That makes 14 weeks in a row for IG funds.

High yield managed to attract another $834 million. It’s been a truly remarkable run.

Quite a bit of the confidence in corporate credit emanates from the Fed backstop. JPMorgan’s Oksana Aronov called it all a “hallucination” on Friday.

“Market valuations are entirely fabricated — or synthetically generated — by all the central bank liquidity and do not reflect fundamentals of the securities they represent”, Aronov said. Investors, she warned, are “locked in [a] collective hallucination with central banks around valuations and what they mean”.

Fair enough. But the problem, as ever, is that betting against that dynamic — e.g., getting long vol. on the assumption that, eventually, the “hallucination” will wear off — could be construed as an even more misguided endeavor than the absurd state of affairs such a position is designed to fade. In other words, betting against the benefactors in charge of the printing presses is historically a losing proposition.

“Central banks continue to run the show and investors need to be really cautious here”, Aronov went on to say. “We’re going into a difficult second half”.

There’s little doubt about that latter bit. The US is up against a fiscal cliff (or two or three) and you don’t have to be an alarmist to suggest the election might not go smoothly. At the same time, Fink’s “bipolar” economy may begin to manifest itself in a new round of layoffs, or worse.

Those are some of the factors which comprise the left-tail risk for stocks. But remember, this is now a bimodal distribution thanks to the upside created by the central bank support that has Aronov concerned.

“Against the backdrop of very large policy and economic uncertainty amplified by the impact of COVID-19 (left hand tail risk), supportive policies from the government and central bank create substantial upside risks in equities”, SocGen’s derivatives team wrote this week.

“Equity volatility therefore appears genuinely bimodal, and this leads to higher tail-risk pricing on both sides”, the bank’s Jitesh Kumar, Vincent Cassot, and Gaurav Tiwari went on to remark.

And with that, we’ll all drift into another summer weekend, albeit one during which beachgoers will be compelled to wear surgical masks. I imagine that could produce some rather odd tan lines.

“As the mercury continues to rise and out of office replies rapidly increase in frequency, we are reminded of the age old market adage: the trend is your friend”, BMO’s Ian Lyngen said Friday afternoon. “Whether ‘range-bound’ is the ideal companion for the next socially distant backyard get-together is up for debate, but at this point we’ll be happy if anyone shows up”.


 

3 comments on “Bipolar, Bimodal.

  1. John3D says:

    Wondering out loud if small and mid-size businesses continue to fail will large businesses fill the void thereby consolidating their market dominance and even monopolization? How long before we are beholden to a few market behemoths for much of what we need. This wouldn’t be possible without the internet and the digitization of everything.

    • calh0025 says:

      I suspect an even worse outcome… as small and mid size businesses fail products and services permanently disappear. Often times the services these smaller businesses provide aren’t profitable enough for larger enterprises to bother with so you could very well end up with an absence. Bigger enterprises are certainly most likely to garner stimulus and survive but they will not necessarily fill the gaps left behind at least not all of them. We already see food deserts across the country where there is inadequate access to grocery stores and this will likely expand to a wider range of products and services especially in lower income areas.

  2. Vlad is Mad says:

    Is the bimodal equity distribution real or just a story that get trotted out every so often that rarely materializes. Remember upside call volatility getting bid in January 2018. You all know what happened of Feb 5th, 2018 right?

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