February has been a bit of a gut punch for markets triggered by strong payroll data in the US, which started a spiral of worry – worry about the economy overheating, worry about rising inflation, worry about rising bond yields (the 10 year today topped 2.9%) and worry about the rise in volatility (which experienced its single biggest daily jump last week).The second week of February was the worst week for markets since the financial crisis. The media made much of the total point drop (the Dow Jones dropped 1000 points in each of two non-consecutive separate trading days) but this masked that this was far from the higher percentage drop for that index.
More concerning is the technical impact of the unwinding of certain short volatility trades, which have been used by institutional investors to increase income. The writing of options contracts (put or call selling) were pitched as an attractive source of income, with limited risk due to the prevailing calm in money markets. Other investors went so far as to short the VIX – a bet on the volatility index falling and staying low.
This weeks markets seem to be feeling warmer – and largely shrugged off the Wednesday CPI numbers which showed that CPI rose 0.5% in January, the largest increase in five months. Today the Dow passed 25,000 again as confidence came to the fore. The consecutive five day gain is now the largest since 2011, and it does indeed smack of animal spirits. For our part, rebalancing will be the name of the game – assiduous rebalancing. It feels like we have experienced a near miss in this instance. Today the stock market is indeed feels like a “TINA” – “There Is No Alternative”, but as another Tina would say – Simply The Best solution may be to take profits now.