Sunday, August 7, 2016

Market themes on one page for August

As we have commented in the past, the financial month really starts with the non-farm payroll numbers. This economic number sets the tone for the month with regard to Fed action or other economic announcements. A good number and Fed action is on the table. A poor number and the Fed is on hold. Similarly, economic announcements throughout the month will be gauged on whether it reinforces or contradicts the NFP number. Every number in August will be judged by whether it will make the Fed's labor market data dependency story stronger. Of course, we will have Chairman Yellen speak at the Jackson Hole conference later in the month, but we can expect that this will only add confusion as opposed to policy clarification.

Our biggest concern is the complacency that seems to exist in the market action. With the VIX at such low levels, it seems as though markets don't care about the geopolitical and structural upheavals around the world. Acts of terror even if believed to be uncoordinated and through "lone wolves" should dampen investment optimism and should cause portfolio rebalancing. This should add to volatility. BREXIT, BOE rate reductions, ECB policy effectiveness, and BOJ uncertainty should all add to volatility, yet we are not seeing it in the markets. Even US presidential polls that bounce between, in many ways, flawed candidates has not created volatility. 

Perhaps with August vacations and the heat, there will be continued lethargy about portfolio rebalancing, but our read of the past is that markets will ask for a greater premium to global uncertainty. Sometimes it will take longer than expected by the smart money pessimists, but it will occur. Buying downside protection which is now cheap seems to be a strategy that should be given more consideration.

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