The S&P500 gained about 0.6% last week, in very light trading. And volatility remained very low—the VIX index continues to hover near multi-decade lows. The risk here is that a big reason behind the super low level of volatility is the fact that many investors have begun to sell put options on stocks, as a way of supplementing their low returns. The problem of course is that while this strategy may work well in the short term, it may someday blow up in everyone’s face if or when stocks decline by a meaningful percentage. These investors are betting that the stock market will not decline in the near to intermediate future.
In macro news, the week got off to a poor start. Personal spending missed, and so did personal income. Also core PCE, year-over-year (one of the Fed’s preferred measures of inflation), also missed to the downside. In other words, inflation has not risen to the 2.0% threshold desired by the Fed, so its tightening cycle seems to be in conflict with one of its two key mandates. ISM manufacturing also missed. Construction spending missed very badly. On the other hand, ISM services beat estimates. So did international trade and initial jobless claims, which hit a multi-decade low (implying that jobless claims don’t have much more room to fall). Factory orders missed, and productivity missed by a mile (this means that unit labor costs are rising more than expected, and this will hurt corporate profits in the near future). Finally, payrolls beat expectations, and so did the headline unemployment rate. But average hourly earnings only met expectations and the labor force participation rate moved the wrong way—it ticked down.
The technical picture for the S&P has not changed much in the last week. On the daily charts, the S&P is in an upswing. But on the weekly charts, the damage that was done in April has not yet been erased.
Finally, there’s a lot of talk among market pundits that stocks are still a great place to invest most of one’s money and that we shouldn’t worry about a big decline in stock prices; on the contrary, investors should use a dip in prices only to buy more stocks.
One, among many, of the problems with this argument is that implicitly, these stock market bulls are arguing that US economic cycles and US financial market cycles are no longer a threat. In other words, they are implicitly saying that recessions and bear markets have become obsolete….mainly due to the way that the Fed has seemingly prevented any of these threats from materializing over the last 8 years.
So if you buy into the argument that now is still a great time to be massively long the US stock market, then you are also buying into the implicit assumption that US economic and market cycles are obsolete. And if you do, then good luck; you’re going to need it.