Скачать или смотреть Volatility and Treasury reaction to Powell Remarks

Bond Markets/Rates:
The slight inversion between the 3 year and 10 year indicates that investors expect rates to rise rapidly but don’t expect inflation to be long term. We don’t have a fully invested yield curve so the likelihood of a recession, while possible, is still small. The shorter end inversion is more likely an indication of stagflation. But what happens in the economy doesn’t directly translate to equity markets. Equity markets are always forward looking, and can be moved up by sentiment and investors coming off the sidelines, end this year’s buyers strike.

Ukraine/Volatility:
It has been a difficult month for investors, facing uncertainty and fear from three major fronts: inflation, monetary policy, and Ukraine. For the past two years investors have usually only had to face one major fear at a time, alternating between COVID and inflation worries. Since mid-February bond, equity and the VIX were indicating the increasing and crushing fear. But the past week has three indications that we might be heading towards calmer waters. Stock prices were broadly up, bond price have been going down, meaning rates are going up, (see chart) and the VIX finally broke below 30, dropping sharply to close at 23.9 on Friday. While we may not be out of the woods just yet given the unsettling Ukraine invasion, the bond and futures markets have been indicating more risk taking.

I think the VIX really shows just how extreme the fear was. Whenever the VIX gets above 30, it is essentially in the extreme fear period. The VIX is only in the 30-100 level about 10% of time historically but this year has spent 30% of the trading days in 2022. It’s a level where the S&P 500 moves an average of 2% either up or down, with slightly more down days. So far this year has been about 3X more fearful than a typical year if you investors don’t already feel it. That keeps money on the sidelines. I think it’s going to take some time to get investors to trust the strength of the S&P 500 companies. As we move through earnings periods of 2022 and companies continue to prove they can be profitable and break into higher growth investors will slowly take the cash off the sidelines but it’s going to take some time for that fear to be removed.

Contrarian:
Mid and small caps are look attractive despite higher interest rates because of their valuation. They are now so heavily discounted they are almost a defensive play. While some valuation compression is expected during periods, the premium for large caps is now at an extreme 25%. The S&P Midcap 400 normally trades at HIGHER valuations than large caps, because of their higher growth, but is now trading at a 25% DISCOUNT. We do not expect this inversion of premiums to persist long term and expect a reversion where midcaps could significantly outperform.