We’re living in historic times.
People tend to say things like that when something’s just gone horribly awry. In the market context, proclamations about “history in the making” typically accompany meltdowns, but also melt-ups.
As someone who now spends his days reading and writing, I’m not particularly fond of such declarations. The “times” are always “historic.” We make history every, single day. Strictly speaking, there’s nothing more “historic” about a day when something unusual happens than a day that passes without incident. Every day is a part of history by definition.
That’s a bit pedantic. But it helps offset some of the hyperbole being bandied about following a “historically” rough start to the new year for US equities (figure on the left, below) and the persistence of elevated realized volatility amid a wide distribution of daily outcomes (figure on the right).
Nomura’s Charlie McElligott used another, more apt, expression to describe our present circumstances. The subject line of his most recent missive carried the ironic old adage, “May you live in interesting times.” While no day is any more “historic” than any other, some days, weeks, months and years are most assuredly more interesting.
Despite what feels like one, long tail event, vol-of-vol has actually come in a bit from last month’s levels. “With VVIX staying well-behaved at 125, it doesn’t feel like there’s any sort of convexity out there in the ‘Big’ benchmark Index,” Charlie went on to write, before suggesting traders keep themselves apprised of reals and credit spreads.
Plainly, January was all about the spike in real yields and the “gravity” it exerted on equities, which came into 2022 trading on nosebleed multiples (updated figure on the left, below).
But now too, folks are starting to talk about credit (figure on the right), where outflows are picking up.
“Updating the short-term macro price drivers for US Equities from Quant-Insight… the downside continues to be driven by the double-whammy that is 1) Real Yields and 2) Credit Spreads,” McElligott wrote. “Keep ’em on your radar, because both those trends continue to build steam and leak in the ‘wrong’ direction for Equities bulls.”
BofA’s Michael Hartnett, who spent quite a bit of time documenting “sinister” price action in credit in his latest, noted that the Fed’s forthcoming tightening cycle, short-lived though it may ultimately be, will commence with equities very vulnerable from a valuations perspective. I mentioned this in a separate piece, but the table (below) drives the point home.
The bull case for stocks, Hartnett said, “requires an ‘affirmative’ to the three biggest investment questions of 2022.” Those questions are: “Will the Fed engineer a soft landing?”, “Are we early in the investment cycle?” and “Will the Fed blink?”
Suffice to say Hartnett is skeptical of the Fed’s ability to stick the proverbial landing. “We are short tech, credit and private equity, as the era of QE is over,” he said, calling last week “historic” as the rates shock “goes global, tech wreck threatens systemic damage and the recession scare goes mainstream.”
I don’t know if it’s all “historic.” But it certainly is interesting.
But this time it’s different!
H_ Man, the big shift is coming. Vol is the game.
I think the incessant cries of “historic times”, while irritating, are useful inasmuch as investors may need reminding that we are, in fact, at the cusp of some large and fundamental trend changes, such that the instincts developed over the past decade or four should not be blindly trusted.