Fasten Those Seatbelts and Expect the Unexpected in Markets

On Monday, August 5, 2024, the leading stock market indices corrected sharply lower, but the most significant move came in the VIX, the volatility index. The VIX reached a record 89.53 high in October 2008 during the beginning of the global financial crisis. In March 2020, as the worldwide pandemic gripped markets across all asset classes, the volatility index rose to a slightly lower 85.47 peak. On August 5, while stocks fell, there were no significant global events, but the volatility index exploded to the third-highest level in history at 65.73. One month later, in early September, the index that measures the implied volatility of put and call options on the most diversified U.S. stock market index had receded to around 15. Meanwhile, the August 5 price action could have been a significant red flag warning for the coming months as markets face many issues on the economic and geopolitical landscapes. As markets move into the final months of 2024, the VIX told us to fasten our seatbelts for a wild ride.

U.S. domestic politics- A contentious election on the horizon

• Polls had forecast a victory for former President Trump over incumbent President Biden.
• With Vice President Harris replacing the incumbent President, the polls have shifted her to the leading position.
• The polls remain close enough to make the election a contentious toss-up.
• The election will determine the future of U.S. domestic and foreign policy, creating lots of uncertainty ahead of Election Day.

Geopolitics- A hornet’s nest of potential turmoil

• The war between Russia and Ukraine has escalated, with Ukraine attacking Russian territory and Russia responding with an increased bombing campaign.
• The war in the Middle East between Israel and Iranian proxies threatens to escalate and draw in other countries, including the United States.
• China remains committed to reunification with Taiwan.
• North Korea and Iran are nuclear powers.
• The bifurcation of the world’s nuclear powers threatens world peace.

The global economy- Uncertainty for central banks

• The U.S. remains the world’s leading economy.
• The U.S. Fed is preparing to cut short-term interest rates as inflation has moved toward its 2% target and unemployment has edged higher.
• The Fed waited too long to address inflation with higher rates. Given the recent economic data and the August 5 stock market scare, the central bank may have waited too long to cut rates.
• Central banks worldwide tend to follow the U.S. interest rate policy. European central banks have already begun trimming interest rates.
• The Chinese economy remains weak. 

Debt- Ugly levels threaten stability

• S. debt at over the $35 trillion level weighs on the economy’s future.
• If the Fed cuts rates to 5%, it will still cause the debt to rise by over $1.75 trillion per year.
• Even if the government can balance spending and revenues, which is more than a leap of faith, the debt will continue to rise.
• Countries worldwide face increasing debt issues that could weigh on sovereign debt and currency values.

A trader’s paradise is an investor’s nightmare

• Asset prices reflect the economic and geopolitical landscapes.
• Uncertainty fosters increasing asset price volatility.
• Passive investors dread high price variance.
• Flexible traders embrace high volatility as it creates a paradise of opportunities.

We could look back at the August 5 stock market volatility as a warning sign. Global economics and politics remain highly turbulent, increasing the potential for wild market price swings across all asset classes. Fasten your seatbelts as the November U.S. election could cause lots of action. Expect volatility and the unexpected so you will not be blind sighted over the coming weeks.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!