Why has volatility returned to the US equity markets

Jay Soloff

Why has volatility returned to the US equity markets? The VIX is trading above 20 for just the third time this year. Keep in mind, 20 is the long-term historical average for the fear index, and it's basically the cutoff point for what we consider volatile markets. Yet, equity volatility... Show More

There's been plenty of news to discuss lately concerning the US economy/financial markets, but perhaps the most important bit of insight comes from Nobel...

Jay Soloff

There's been plenty of news to discuss lately concerning the US economy/financial markets, but perhaps the most important bit of insight comes from Nobel Laureate Paul Krugman. The famous economist does not believe the Fed will raise rates in 2015. Coming from Krugman, who's economic predictions have been about as... Show More

Is the Big Mac dead or is it just economics

Jay Soloff

Is the Big Mac dead or is it just economics? Today's news out of fast food giant McDonald's is anything but good. November sales were down in all three major regions for the burger chain, and were especially bad in the US. Global same-store sales fell 2.2% for the month,... Show More

The problem isn't even so much with federal spending, although that would help certainly, but state and local governments have cut way back. Regarding federal borrowing, when they do go up, it would presumably be in line with a growing economy and thus greater tax receipts. Also, much of the spending is based on automatic spending programs due to the recession (welfare, food stamps, unemployment, medicaid/medicare) and doesn't necessarily target job growth but maintaining a minimum standard of living. Much of that will go away (not the medical stuff) as the economy improves.

On Larry Summers, former Treasury Secretary under Clinton and an important economic voice, is urging the US government to spend more -

Meant to include this originally, but here's the Fed Statement Tracker, which shows what's changed from the last statement. http://projects.wsj.com/fed-statement-tracker/

On The moment of truth has arrived.. -

Most of the contrarian views in the US are coming from the far-right wing and are mostly based on political beliefs rather than economic principles. Mainstream economists generally agree that the US is recovering slowly but would like to see the growth rate pick up. Regarding Shostak, making any predictions based on the money supply during a liquidity trap is a recipe for error. I don't believe money supply makes a bit of difference in a demand-constrained economy.

On After slowing in the earlier part of the year, the US economy looks to get back on track, according to the Conference Board's Leading Economic Index -

Debt to GDP ratio is returning to roughly pre-financial crisis levels. I don't think debt servicing will impose a significant drag on GDP unless/until Medicare or Social Security becomes a major burden when all the baby boomers are done working. If nothing changes, that won't be for another 30 years or so.

On Is the new normal for US growth going to be just 2% -

Jordan, I don't have any evidence to support this, but perhaps the construction hiring is being done in advance of warmer weather approaching? Maybe there's some lead time in getting workers trained and ready for the busy season. The actual construction results (new residential construction) fell 10% in the most recent report - which seems to me a little more reflective of the impact of bad weather.

On Is the US economy faltering or is just the bad weather -

Equities are way up on the news - and I think it may continue. Once again, it's a big deal and a major policy shift for the Fed to say Fed Fund Rates will stay at 0% despite 6.5% unemployment. Inflation (CPI, PPI, core inflation) is going to be the big thing to watch moving forward.

On The moment of truth has arrived.. -

At least part of the move higher seems to be based on analysts expecting better Black Friday results. While the results weren't bad, they aren't as good as hoped. So, a bit of investor fear may be creeping into the market or investors could be adjusting expectations to take into account expected lower earnings next quarter.

On Do you pay attention to market volatility or monitor the level of investor fear -

I don't think bond buying will necessarily go away in 2014, but I do believe it will be reduced. Maybe the reduction won't be substantial - and it will have nothing to do with the money supply or inflation potential. However, I think Yellen will want to wean the market slowly off QE so we won't see huge selling in equities each time there's an announcement that bond purchases will be lessened.

On Fed Chair nominee Janet Yellen will have the daunting task of winding down Fed stimulus without causing the equity markets to collapse -

I should clarify, I think it will continue past March, but I believe the purchases will start getting reduced around that time. Reductions could end up being minor (say $5-$10 billion at a time). The time frame may certainly change as economic data is released. The single most important factor will be the jobs number, followed closely by CPI or other inflation measures.

On Fed chair nominee Janet Yellen dropped some gems in her testimony before the Senate Banking Committee -

It does seem a little like 2000 with some of these high flyers in tech and social media. One thing I will say, back in 2000, nobody really had any idea how many of the companies were going to generate profits. It was all hype and very little was quantifiable. These days, at least there are models and projections which show the path to profitability for a given business. Now, some of these may be entirely too optimistic (Twitter likely falls into that category) - but at least there's some logic behind the lofty valuations

On Is Twitter (TWTR) overvalued -

In some ways, Twiiter should be more straightforward vis-a-vis valuation. It basically has one product. FB is expanding into quite a bit more diverse territory. Plus, Instagram could be a big deal for them and is basically not being monetized right now.

On It was a lively day for investors in social media giant, Facebook (FB) -

Interestingly the VIX drop to below 15 is well below its historical average of 20 - but a relatively normal level for what's typically considered a non-volatile market. On the other hand, VVIX (the implied volatility of the VIX index) dropped 17% to almost exactly its historical long-term mean of 86. You could say that volatility traders are neutral on risk right now compared to equity (or index) option traders who appear to believe the worst is over.

On We note that the VIX has just posted a solid 1-day retreat of -21.2% in conjunction with a robust S&P 500 gain of +1.4% -

Inevitably, it may not be until 2015, investors will start to worry about inflation. We'll have to get past the debt ceiling issues, tapering, and other non-standard events. But at some tipping point in the future, positive economic data will once again correlate to rising inflation expectations. When that happens, history suggests gold will catch a bid. In the meantime, there's a floor on the price of gold due to geopolitical risk and uncertainty. In terms of strategy, I believe it's a good scenario to sell copious amounts of put spreads.

On The gold market has been range bound the last couple of weeks, frustrating many who thought it would catch a 'safe-haven' bid in light of the US shutdown and... -

Hard to tell what the Fed is looking at in terms of data. They rarely, if ever, give specifics - preferring to stick to vague generalities. I wouldn't be surprised if they made their decisions based on in-house analysis and then let the crowd play guesswork games over what the central bank is actually seeing.

On Was the Fed's 'no taper' decision based on phony job numbers -

Markets may not buy into it right away, but the danger is real. Obama won't give any ground on his one true accomplishment (universal healthcare) and Republicans have nothing left to lose. If multiple government operations do shut down, it could have a very adverse effect on the US economy - which is precisely what the country does not need right now.

On With Fed tapering on hold for another month, what's the next hurdle for the US economy to clear -

However, the most realistic worst-case scenario for the Fed's actions is higher than desired inflation. The Fed does have a relatively successful history of being able to control inflation. Moreover, you could argue the Fed isn't doing enough to promote higher inflation - which would both erode debt overhang and savings - and should lead to greater consumer spending.

On The Fed's decision to delay the inevitable, the scaling back of its stimulus program, reinforces our view as to the relative shakiness of the US economy -

The hope is that ejecting 3 companies representing just 2% of the index will more equally balance the impact of all 30 index components. So for instance IBM's weighting will be cut from 9.4% to 7.9% after the new additions. In theory, this should reduce the index's volatility - but we won't know for sure until the actual changes take place starting next week.

On The widely followed Dow Jones Industrial Average is changing out 10% of its components, but should you care -