Why ‘Buying the Dip’ May Have Run Its Course
Why this time it looks different.
Why this time it looks different.
“This time it’s different.” These can be the four most dangerous words that any investor can utter.
The phrase can trip up the unwary in myriad ways. “These valuations seem unsustainable,” one might contend. Don’t worry, this time it’s different. “This technology has failed every time it’s been tried before.” No problem, this time it’s different. Any of us can attempt to justify all sorts of wild schemes or nosebleed prices on the idea that they aren’t subject to the norms that have applied before.
But here’s the rub—sometimes it really is different. Major turning points occur when there is a secular change in the economy’s fortunes or a notable development that affects a company’s long-term prospects.
Think back to early 2020. The global Covid-19 outbreak was indeed something different, and markets fell precipitously. The massive monetary and fiscal stimuli that were offered in the crisis’s wake were something different as well, causing asset prices to leap. Enormous opportunities were available to those investors who astutely recognized the seismic shifts.
If we acknowledge that monetary and fiscal stimuli were key factors in the great bull run of the past 18 months, how do we reckon with the possibility that both may be coming to an end? Federal Reserve Chairman Jerome Powell recently acknowledged that the central bank would be tapering its $120 billion monthly bond purchases “soon” and would likely end them completely in a matter of months.
The Fed may be taking its foot off the monetary gas pedal, but it won’t yet be tapping the brakes by raising interest rates. It isn’t clear how markets will react to a less expansive monetary policy, even though one is likely to be upon us soon. Furthermore, investors appear uncomfortable with a Congress whose lack of progress on the debt ceiling, budget reconciliation, and infrastructure bills have turned fiscal policy from an economic tailwind to a potential headwind. And, after a long absence, inflation seems to be rearing its ugly head.
It should thus be no surprise, then, that volatility has returned to major U.S. indexes. Uncertainty begets volatility. Volatility ebbed when it was clear that market-friendly policies were in place and pushed higher after the Fed’s stance began to morph.
Each of the past three weeks has featured at least two days with over 1% changes in the S&P 500 index and at least one 2% decline in the Nasdaq 100. When the S&P hit an all-time high on Sept. 2, its 10-day historical volatility was 8.09. On Oct. 5, just over a month later and after four sequential 1% up and down days, that measure had nearly doubled to 15.76.
While implied volatilities on S&P 500 options have risen across the board, we recently noticed a significant change in the relative valuation of out-of-the-money options, or “skew.” Early this week, implied volatilities had risen most for options that are about 5% below market and barely budged for options that are 10% above market. This tells us that traders are focused on hedging a decline that would signify a normal correction and less eager to speculate on a significant short-term bounce.
Markets in general, and the options market in particular, are telling us that we should be concerned about how events could play out in the coming weeks. Contrarian traders who are risk-tolerant and well-capitalized could attempt to take advantage of the pricing disparity described above by selling put options to finance call-option purchases. But I would also suggest that investors consider whether their risk exposures are appropriate and use options to manage them in the face of a changing monetary policy and fiscal uncertainty.
Quite frankly, this time looks different.
Steve Sosnick is the chief strategist at Interactive Brokers.
Reprinted by permission of Barron’s. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: October 7, 2021.
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Continued stagflation and cost of living pressures are causing couples to think twice about starting a family, new data has revealed, with long term impacts expected
Australia is in the midst of a ‘baby recession’ with preliminary estimates showing the number of births in 2023 fell by more than four percent to the lowest level since 2006, according to KPMG. The consultancy firm says this reflects the impact of cost-of-living pressures on the feasibility of younger Australians starting a family.
KPMG estimates that 289,100 babies were born in 2023. This compares to 300,684 babies in 2022 and 309,996 in 2021, according to the Australian Bureau of Statistics (ABS). KPMG urban economist Terry Rawnsley said weak economic growth often leads to a reduced number of births. In 2023, ABS data shows gross domestic product (GDP) fell to 1.5 percent. Despite the population growing by 2.5 percent in 2023, GDP on a per capita basis went into negative territory, down one percent over the 12 months.
“Birth rates provide insight into long-term population growth as well as the current confidence of Australian families,” said Mr Rawnsley. “We haven’t seen such a sharp drop in births in Australia since the period of economic stagflation in the 1970s, which coincided with the initial widespread adoption of the contraceptive pill.”
Mr Rawnsley said many Australian couples delayed starting a family while the pandemic played out in 2020. The number of births fell from 305,832 in 2019 to 294,369 in 2020. Then in 2021, strong employment and vast amounts of stimulus money, along with high household savings due to lockdowns, gave couples better financial means to have a baby. This led to a rebound in births.
However, the re-opening of the global economy in 2022 led to soaring inflation. By the start of 2023, the Australian consumer price index (CPI) had risen to its highest level since 1990 at 7.8 percent per annum. By that stage, the Reserve Bank had already commenced an aggressive rate-hiking strategy to fight inflation and had raised the cash rate every month between May and December 2022.
Five more rate hikes during 2023 put further pressure on couples with mortgages and put the brakes on family formation. “This combination of the pandemic and rapid economic changes explains the spike and subsequent sharp decline in birth rates we have observed over the past four years,” Mr Rawnsley said.
The impact of high costs of living on couples’ decision to have a baby is highlighted in births data for the capital cities. KPMG estimates there were 60,860 births in Sydney in 2023, down 8.6 percent from 2019. There were 56,270 births in Melbourne, down 7.3 percent. In Perth, there were 25,020 births, down 6 percent, while in Brisbane there were 30,250 births, down 4.3 percent. Canberra was the only capital city where there was no fall in the number of births in 2023 compared to 2019.
“CPI growth in Canberra has been slightly subdued compared to that in other major cities, and the economic outlook has remained strong,” Mr Rawnsley said. “This means families have not been hurting as much as those in other capital cities, and in turn, we’ve seen a stabilisation of births in the ACT.”
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