The Roller Coaster Ride Continues

 

 

The market can't seem to settle on the forward outlook. There are perfectly good reasons, such as surging inflation against a backdrop of recent commodity price declines, uncertain Fed policy, and deteriorating-but-still-decent economic data. The up-and-down moves are the result of fluctuating macro headlines and constantly changing Fed policy projections.

The indecisive moves are not only jarring, but they are also statistically significant. On a volatility-adjusted basis, financial markets are registering +2 stdev and +3 stdev weekly and monthly moves across Treasury yields and spreads, USD, commodities, and corporate credit spreads. Referring to the first paragraph, the 2Y yield registered a -2 stdev monthly decline from mid-June through mid-July followed by a +3 stdev weekly move higher over this past week. The outsized volatility points to an unsettled market swinging from extreme to extreme to extreme, and the situation is exacerbated by light summer trading volume.

While the constantly evolving narrative (recession vs soft landing, inflation increasing vs peaking) makes it difficult to look out more than a few weeks, we continue to think long-term. The intermediate term remains uncertain so we remain cautious, advocating inclusion of defensive sectors such as utilities and dividend investments and a "tactical pause" in asset allocation rebalances, except where risk is misaligned with investor risk profiles. Still, our view is that the market is pricing in a full recession, and current market volatility presents a buying opportunity for 5+ year time horizons.