We are approaching the end of a very long tunnel. Volatility has re-emerged but is not anything like what we saw in March. See daily chart of S&P500 and 20 day historical volatility below.
Historically, the Fed has always added stimulus when equities started to roll-over - it’s why they are in such a mess. Now, 7 weeks before the US election adding stimulus is a more political decision and hence one the Fed will likely deliberate over for longer. That risks additional volatility.
Do not expect the Fed to add much to Powell’s recent statement on inflation targeting when they meet next week. They will implore they continue to target higher inflation but will not likely announce increased QE or yield curve control (YCC) without another material fall in equities.
Ahead of Powell’s Jackson Hole speech, I was set up for the Fed announcing YCC. I still expect another effort by the Fed for more easing in reaction to a deterioration in the economy in Q4 at some point soon.
From the below chart of my 3 Darwins you can see how SBY has lagged in recent months. This was due to its focus on the long term and hence it has suffered from this ‘recovery’ in recent months. The last 10 days of increased volatility however has seen it outperform. Across the 3 Darwins, I am therefore comfortable I have this next phase covered. The next phase being the Fed meeting, US election and end of the various furlough schemes.
I have added negative equities in SKI in September (SBY and LWE were already short) in anticipation of the belief “stocks always go up” is coming to an end. The GOP and Democrats are not likely to agree a new aid package before the election. The Fed is unlikely to risk looking political by helping Trump out with a new stimulus package of their own ahead of the election date. That leaves a chasm into which equities may fall.