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Expect Nasty Volatility & Shocks This Summer

Expect Nasty Volatility & Shocks This Summer

With the stock market heading no where for the last 4 months of this year, it is high time we took a step back and view things from a systematic angle. As we approach the "sell in May and go away" phase of the year, equity returns are looking more vunulrable to adverse shocks, and flares in volatility.

YTD, the S&P 500 is almost unchanged, down marginally. Bonds (quality) and commodities (short USD) have been the best performers for the last 4 months. Vol of vol (VVIX) has remained elevated but is not yet deemed to be at alarming levels. What's in store for us may be a surprise. Or actually maybe not.

When we piece this puzzle back in a way BofAML calls the "3P's of Positioning, Policy & Profits", we can come to the conclusion that the risks are skewed south, and things could turn uglier very promptly. Therefore, it may be wise to expect very moderate returns from equities. One may wish to overweight cash, bonds, and gold while avoiding equities and non-IG corporate credit.

Bill Gross: Worry About "Return Of Capital" Instead Of "Return On Capital"

Bill Gross: Worry About "Return Of Capital" Instead Of "Return On Capital"

In this month's investment outlook, Janus Capital's Bill Gross warns about the mounting stresses in the global financial markets and why you should be much more concerned about the return of your capital, than the return on your capital.

Clearly for the bond king, size does matter. The size of recent market movements, during a time when most central banks in major developed markets have stopped their balance sheet expansion programs, is telling us participants that all is not well and that there may be something lurking behind the shadows.

Gross talks about how nearly 8 years of zero bound interest rates and QE have led to a global economy that is now so out of whack it would take a shock, in the form of secularly higher interest rates and borrowing costs, to fix. But therein lies the rub. Markets get absolutely spooked on any mention of a rate hike or a cut back in existing expansionary monetary policies (ECB, BoJ, PBoC, ect...).