May market commentary; May 10, 2019
The recent week has certainly seen the return of volatility. After a 4-month absence, the market has reminded us all that it can and will go down at times.
Therefore, here is the tail of the tape: Markets were over-bought in our opinion, therefore due for a significant pull back. The U.S. – China trade negotiations break down was the headline that was needed to trigger the pullback. Yet at the writing of this, the S&P 500 was -2.5% on the week, hardly a shocking pullback at this point.
Overall, our interpretation of economic and market data remains mixed. In our opinion market sentiment is positive, the Federal Reserve remains neutral, while overall valuations and economic activity are negative.
This is a quote from our full commentary report:
Once again, we find ourselves observing the unforeseen. It is a reminder that we don’t know what is going to happen in the future. All we can rely on is a disciplined process that is prepared for handling whatever comes our way. This is why we follow a disciplined, four-pronged framework for dealing with markets. Now, whether the tariff increases actually occur and Chinese trade negotiations crumble, or if markets respond with panic, we will have to wait and see. However, the stage is set for some more fireworks with a huge short position in volatility. Let’s just say if volatility spikes, these short positions could start covering and a positive feedback in volatility could result (negative feedback loop in equities). Things could get interesting.
As always, we appreciate your trust and confidence in us and the relationship that we have with you our clients and friends.