Market volatility will remain as global uncertainty about food, war, and central bank tightening is happening at this point.
Bond volatility has reached levels not seen since 2020, and before that, we have to go back to 2009.
The Federal Reserve has been laser-focused on “controlling” bond volatility because as this picks up, it creates a hesitancy for banks to lend and companies to borrow.
Small businesses are still trying to pass through as much of the cost as possible, but we are seeing the pace of selling prices slow
Bond Volatility
Bond volatility is also an excellent leading indicator for equity gyrations, but the equity market is heeding the warning right now.
The equity market is moving sideways at an elevated rate, but we haven’t seen any real panic selling.
We haven’t seen increased put buying (downside protection), higher redemptions, or a reduction in risk-taking.
Another critical point in this chart is how long the bond volatility has been elevated.
It wasn’t just a “shock and fade” but a very sticky move higher.
This happens when you have a world going from record easing to record tightening in only several quarters.
Up and Down – Quickly
The below chart shows just how much of a record is being set for the tightening side of the central bank equation. We have seen close to this level of easing (2008), but we have NEVER seen this magnitude of tightening.
The uncertainty forces banks to tighten financial conditions and limit the amount they lend to the market.
Banks want to make sure they are protected as yields explode higher.
We are in an unprecedented world with global food shortages, elevated inflation, and geopolitical instability at the highest level since the 60s/70s.
Not So Great Expectations
Investors and fund managers agree that global growth expectations are at their lowest.
However, this same group has been slow to go underweight equities, but their adjustments are happening slowly.
But when we zoom out further, we can see redemptions are just beginning!
The market has started to roll over a bit, but there has still been money flowing into equities.
The Fed has created a FOMO (Fear of Missing Out) environment and BTD (Buy the Dip) mentality that takes time to change people’s behavior.
REDEEM! REDEEM!
We’re in a global tightening scenario with slowing growth, yet investors are still buying equities.
If you didn’t buy stocks during the Fed Easing- you were “fighting the Fed.”
So what is it considered now?
A possible reason we could still be seeing such a large allocation to equities is money flows.
There’s still a vast amount of liquidity in the market. The Federal Reserve has been clear on its intentions to raise rates, but they have only raised 0.25% and haven’t started to sell its balance sheet yet.
They are expected to start selling down some of their MBS (mortgage-backed securities) and treasuries beginning in May and accelerating in June at a rate not to exceed $90B a month.
It’s worth noting that bond volatility has exploded, and yields have ripped higher, yet the Fed hasn’t even started raising rates in earnest.
So what happens when they do?
The market expects a big spike in the Fed Funds Rate approaching 0.75%, but equities have barely budged.
Monetary tightening is happening worldwide at varying rates, and the U.S. is one of the last (the very last is reserved for the EU and Turkey).
As central banks tighten, there is a very close relationship with PMI (Producer Manager’s Index), a key present and leading indicator.
In summary, the world is slowing, rates are rising, fear is mounting, geopolitical instability is growing, and food shortages rival the 1930s dust bowl.
The question is this: how big is your equity exposure?
Take care,
Freedom Financial News
