Forward Note - 2024/03/24
Lower (volatility) for longer
All our thoughts are with the victims in Russia. A life is a life before being a nationality.
Three rate cuts in 2024. That's what Jay Powell hinted at, and now the markets are holding him to it. Of course, he didn't make any promises, and in true Jay Powell style, he emphasized that any decision will depend on the data. Nevertheless, despite the recent readings, three rate cuts remain a possibility.
That was all it took to propel the market to a new all-time high. Even though they couldn't maintain their peak levels on Friday, it was still an incredibly positive week for US equities. The S&P 500 gained 2.21%, while the Nasdaq closed nearly 3% higher at 18,340.
The cue that everything would be okay on Wednesday?
It's always difficult to anticipate how these events will play out, but we couldn't help noticing the significant drop in the VIX and VVIX on Tuesday, just before the event. It was intriguing, to say the least. Why would the market shed its hedges before the event if it wasn't almost sure that nothing would go wrong?
We haven't conducted extensive research on how predictive such movements are right before the FOMC, but we'll keep an eye on them for the next one and may come up with something soon.
So, what's next? A lazy spring, lounging in the grass and soaking up the first sun rays in the northern hemisphere parks? That sounds appealing and likely.
While economists debate whether inflation is sticky or on the downtrend, Powell has been quite clear on one thing—data dependency. It was frustrating a few months ago when everything looked okay, yet he didn't cut rates. However, it's now incredibly convenient to avoid rushing to the conclusion that inflation is here to stay. Perhaps the data for January and February were just anomalies that will correct themselves in the coming months.
The Fed essentially says, "Well, guys, we don't know and need more data to make a decision." And you know what? We can't do anything but applaud the approach's candidness and thoughtfulness.
In a time when social and traditional media are constantly seeking the next smart view or clever analysis, it's refreshing to hear the person most qualified for the job acknowledge the task's difficulty. Remember a few years back when everyone, apparently much more intelligent than Mr. Powell, was laughing at the prospect of a soft landing?
Ironically, everyone seems to cry as the market keeps hitting new highs and dismisses their brilliant views. Once again, why would fund managers stay on the sidelines? Americans have jobs, Q1 earnings results were far from terrible, and while inflation is still elevated, it's much more manageable than 18 months ago.
The Fed also implicitly opened the door to potentially accepting a higher level of inflation in the coming years. Isn't that what some economists were calling for anyway? They pointed out that the years of super-low inflation were over, and we're now in an economy more reminiscent of the 80s than the post-GFC era of 2010.
We certainly refrain from having an opinion on the matter. However, it's hard to imagine that if things were gradually improving without returning to 2%, Jay Powell wouldn't cut rates after what he delivered last Wednesday. And even if it weren't three rate cuts but just two, with low unemployment and high growth, that would be a fantastic economic performance.
So, what's the bear case? As traders, we don't understand it. Unless some new inputs seriously challenge the current narrative, we'll likely remain in this super-low volatility regime for a while.
Now, let's not get complacent: a deterioration in the GDP on Thursday or a significant re-acceleration of inflation highlighted in the PCE this Friday could spook investors. But until proven otherwise, the market's message is clear:
Lower (volatility) for longer. And deal with it.
In other news
Reddit's IPO was this week, and the last thing we can say is that it was a resounding success. For its market debut, RDDT closed up 48%, and even though it lost 8.8% the next day to close the week at $46, this is a very positive sign for deals. After an almost two-year drought, this may very well open the door to the public market for companies waiting for better days.
However, Reddit's journey to profitability may not be smooth sailing. The company faces the challenge of balancing its unique, community-driven culture with the need to attract advertisers and generate revenue. As Reddit tidies up its platform to appease advertisers and Wall Street, it risks alienating some core users who value the site's unruly and unconventional nature.
We will closely monitor the first few quarters; it should be fascinating.
Thank you for staying with us until the end. As usual, we'll leave you with some of the best reads we've come across this week:
- a has written another fascinating piece. At a time when geopolitical tensions continue to mount, the question of what role the US will play in the global world order is perfectly on point.
Can you believe it's already the end of Q1? If you need a complete roundup,
has got you covered.At Sharpe Two, we continued exploring regimes, but this time, we tried to find out why some names would structurally perform better than others in specific regimes.
That's it for us this week. We wish you a wonderful week ahead. Happy trading!
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