Concerns about the potential economic ramifications of the rapidly spreading, highly infections “Delta” coronavirus variant are seeping into markets, we’re told.
But the layperson (i.e., someone not inclined to look too far beyond the benchmark quotes that sit atop various business sections) would have a hard time locating those “concerns.”
Global equities were poised to close the book on the first half with a fifth consecutive monthly gain, and a seventh in eight. The same was true of US and European shares (figure below).
Notably, China’s ChiNext rose more than 2% Wednesday to the highest since June of 2015, when the country’s equity bubble famously collapsed.
Records on various benchmarks notwithstanding, there is evidence that market participants are worried that this may be as good as it gets.
“Put skew has turned very expensive – the three-month put skew for the S&P 500 is at a multi-decades high – suggesting investors already fear that some indigestion in the equity market could trigger higher volatility,” Goldman’s Christian Mueller-Glissmann said.
Still, he noted that Goldman’s volatility regime model (an aggregate of macro, macro uncertainty and market indicators) points to a very low probability of a high vol regime (left figure, above). “The probability has dropped from 100% during the height of the COVID-19 pandemic to about 5% now,” Mueller-Glissmann remarked.
Of course, a high volatility “regime” is something different from a volatility spike. The latter is always possible and at a very basic level, predicting fleeting vol spikes is akin to predicting the unforeseen negative macro catalysts which typically cause them. You’re either a fortune teller or you’re not.
Speaking of volatile, Bitcoin had its worst quarter in years (figure below).
I have quite a few regular readers who count themselves crypto proponents. Some of them are well-versed in the space. Generally speaking, they tolerate my jokes because I’m dispassionate about it. I’m not Charlie Munger. That is, I don’t “hate” Bitcoin or resent its success. It’s a digital token, not a vengeful ex who absconded with half my fortune. It’s not something that’s amenable to being “hated.” It has no sense of purpose, although its fans seem to claim otherwise, periodically ascribing something like self-awareness to the coin.
That said, the figure (above) is downright silly. In my opinion, no investment thesis, no matter how compelling, could ever warrant adding something that volatile to a portfolio. Adding amphetamines to my diet would doubtlessly enhance performance over certain intervals — and dramatically so on some days. But it’s not worth it (really, it’s not).
Gold (the non-digital kind) is having a rough time too. June was the worst month in four years (figure below).
I’ll probably add to my (always modest) position. Seriously, I probably will. I don’t resent gold for the same reason I don’t resent Bitcoin (it’s inanimate). But I do resent the necessity of owning an inert metal that pays no interest. However, I have a very simplistic view of markets at the asset-class level. If an established asset class (so, crypto doesn’t count) just had a “worst since…” month or quarter, I’ll typically add a little.
Obviously, gold faces headwinds, with a hawkish Fed chief among them. If tapering is accelerated on the back of, say, a few hot NFP prints, it would likely bring liftoff forward, perhaps into next year. I’d note that holding gold to hedge equity risk can be perilous when the proximate cause of an equity selloff is a sharp rise in real yields. That’s something to think about as the Fed looks towards tightening.
In any event, you’d be inclined to think equities will have a difficult time matching H1’s performance in the back-half of the year. But then again, if someone had told you in late March of 2020 that the S&P would double over the next 15 months, you’d have probably suggested they were suffering from a COVID-induced delirium.