sources: HiddenLevers, MarketWatch, NYTimes, LATimes, FT
Fed = Institutional Paralysis
Chronically ill ?
- Now acknowledges USD rising on global flight to safety
- Admits it doesn’t have tools for low inflation world
- Multiple policy makers suggesting break with mandate
- Knows 3D challenge but raising rates anyway
New S+P sector
Record VIX futures via ETFs, all time highs
Vulnerable to headlines + geopolitical blips
Record MF/ETF outflows Surrendering hedges, diving into equities
Valuation multiples down + earnings up
Disconnect: Most Pronounced in History
sources: HiddenLevers, Bloomberg,
$3.7 trillion restored
to US equities since
Feb lows +20%
US = one of few global bright spots
Record VIX shorts
Main Street Wall Street
Disconnect: Aug 2015 VIX Spike – didn’t stick
Fed rhetoric = hawkish. Fed behavior = dovish. This has muted any VIX spike.
Disconnect: Headlines Don’t Matter None.
sources: HiddenLevers, Economist, CNN, Marketwatch, UMD Global Terrorism Database (Boston Marathon, Charlie Hebdo, Westgate
Shopping Mall, Ankara Train, Nice)
Major Terrorist Attacks
One-time events do not move the market.
Events that affect growth of global economy move the market.
2nd Oil Crash/
Econ Growth Fears
VIX Vacation: VIX 101
sources: HiddenLevers, CBOE
What is VIX?
Market volatility over next 30
days measured by options.
How is it calculated?
VIX observes 100s of SPX puts
and calls to measure "implied"
volatility on options expiring in
VIX + Portfolio Volatility
VIX is NOT the same as historical
volatility, which is based on how
the S&P actually performed.
VIX + Equities?
VIX and equities move in opposite
directions over 80% of the time.
Volatility: Comparison to MDD + Stress Testing
source: HiddenLevers. *Using Fed Stress Test 2016 scenario
S&P 500 – 5 Year
Stress Test Risk* -43%
S&P 500 – 10 Year
10y MDD -54.6%
Stress Test Risk* -43%
Volatility changes with timeframe.
Stress tests provide stable + realistic view of tail risk.
Volatility: Misleading for New Funds
sources: HiddenLevers. *Using Rising Interest Rates and Fed Stress Test 2016 scenarios
Stress Test Risk* -11.7%
Stress Test Risk* -38%
New funds lack sufficient data to rely on
traditional risk stats. With no real downturn
since 2011, stress testing can fill this gap.
When do Headlines Matter?
Katrina + Sandy
Terror in France
Impact on Economy
YAWN: Global Pandemic
Little to no Impact on US markets from Zika
SHRUG: Terrorist Attack in US
Markets recovered from 9/11 crash by October
source: HiddenLevers, Barchart
BAD: Conflict in Korea
North Korea = saber-rattling
S.Korea now #11
Korean War -11%
Gulf War -14%
Wars help US
S&P = +40%
Scenario: Headline Risks
While the travel industry
would feel the impact of a
pandemic, it’s unlikely to
cause meaningful market
impact. SARS killed 750 in
2003 but had no lasting
market impact in Asia.
9/11 caused an S&P decline
of 11% over one week, but
markets recovered within
one month of the attack.
The Korean war led to an
11% S&P drop in June 1950,
followed by a quick recovery.
Korea is a major economy
today, so some impact could
be felt without major US
Vix Vacation – Take Aways
Main Street fears
don’t impact markets
Low VIX lacks predictive value
in bull markets
Headline Risks matter when
unexpected + impact economy
Use stress testing + not volatility, to
judge portfolio risk