Economy
Macro factors are coalescing in a way we haven’t seen in years to produce the perfect storm of potential Volatility, and the VIX is just hovering around medium to long-run averages suggesting a potential swell could be incoming. Advisors should push clients to strategies that can avoid volatility rather than trying to guess this uncertainty. The best option may just be options; a covered-call strategy is a great way to avoid volatility. Investors can lean into betting on medium to long-run growth and sit out excess volatility. This strategy has setbacks particularly if stocks over-perform, so advisors and investors need to carefully monitor the futures market to take full advantage.
Finsum: Now is a great time to take advantage of anti-volatility strategies, yes they don’t have the long-run games but they have strong protections for market volatility.
The average investor is scared of market conditions and as a result we have seen various measures of sentiment plummet, but now could be the exact moment to hit the dip and ride a bull wave. The first reason is the Bull/Bear ratio which was a 1.12 which below two is buy territory and approaching or below one is a strong buy. The other reason is comically low sentiment which usually proceeds a booming period. While inflation fears are rampant, core inflation took a strong movement in the right direction which means that the Fed won’t have to tighten as much. Finally, the pandemic is starting to show sings of trickling out, and while new variants are spreading each subsequent new variant has had a smaller impact and been less lived. This could be a huge win for supply chains which could trickle into lower inflation and much higher growth.
Finsum: There are early signs of optimism for stocks and bonds; the time to strike could be very soon.
Goldman told their investors that their best-case scenario for stocks had the S&P closing 2022 at 4,700, which might mean a 4% increase through the end of the year, but it would still finish below 2021’s close of 4,766. However, their worst-case scenario is very dower and predicts equities tumbling 21%. This scenario has the U.S. falling into a recession. Recession probability is higher than normal right now too as the US saw a 2-and 10-year yield curve investigation which has been the strongest indicator of a recession since the Great Depression.
Finsum: We wouldn’t pick a fight with the yield curve however, there is substantially more inflation pressure in this yield curve than in the previous ones reducing the probability of a recession.
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Oil prices have started to recede but that could just be temporary as reserves flooding isn’t a permanent solution. While demand destruction is possible if oil remains elevated near $130 a barrel, international countries are feeling the pain. Developing economies in Latin America, Southeast Asia, and Africa are being pushed to the limits with energy cost burdens. That effect could trickle into the US. Latin America is already experiencing demand destruction. If oil prices climb and stay above $100 a barrel, energy costs could burden Americans and lead to a recession, but given the security on other energy fronts—unlike in Europe—the US is in a better position to weather the storm.
Finsum: Demand destruction driving a recession is unlikely in the US alone, but if international markets are hit heavily, globalization could cause trickle effects in America.
Many investors have moved off of REITs and they are trading well below their 200-day moving averages. This makes them a value proposition, particularly as volatility starts to rise. Uncertainty particularly around Ukraine and Russia is fueling volatility but its uncorrelated with REIT volatility which gives it a huge risk advantage on top of it all they are more robust to inflation. Two great REITs to consider with great value at the moment are Alexandria Real Estate Equities and Crown Castle International. These REITs have healthcare and telecom exposures respectively which are in a particularly attractive position as healthcare spending is a higher portion of budgets and 5G is exploding.
Finsum: It’s easy to see that alternatives should be seeing inflows given the volatility in traditional equity and bond markets.
Inflation and interest rate risks are two of the most prominent risks in the economy, and they are the reason so many are fleeing traditional fixed income. One place many investors are turning is to annuities, but how does interest rate risk affect annuities? For fixed annuities appreciating rates mean investors can get a better payout with the same premium and generally expand the offerings. For variable annuities, it's trickier as they are more tied to equity markets. If the Fed hikes too aggressively and markets respond adversely this could hurt variable rate products but if the stock market stays steady they won’t be under much pressure. As an income value proposition generally they both perform better than bonds in raising rates because higher yields (inflation and interest rates both moving) suppress bond prices directly.
FINSUM: Annuities have a lot of value in rising rates environments as an income product especially compared to government securities and CDs.