It has been clear for a while that Covid-19 would be a big shock to the global economy, but early predictions of a quick rebound, and a return to normal, now look fanciful. I am now inclined to believe that just about everything will change. My old colleague, and good friend, Jonathan Tepper is musing on a similar note in a recent piece on Unherd.com. I recommend that you go read it; it’s a great piece. For my part, I’ll split my arguments into two observations, not necessarily market-related, but both are key to understand the evolution of markets and the economy in the next few quarters, and I would suggest, beyond as well. We are not even through the first quarter yet, but it’s fair to say that the first chart on my next page already is the chart of the year. It portrays the “optimal” strategy to combat the virus relative to doing nothing, and a policy of loose mitigation. Leaving the Chinese and South Korean outbreaks aside—as well as the grim disaster unfolding in Iran—I think it’s fair to make two overall points. Firstly, there has been a significant debate about the correct strategy to combat the virus. The responses have been scattered on a spectrum ranging from (unconfirmed?) pictures of Chinese authorities welding doors shut to apartment blocks to halt the spread, over to “herd immunity”. Or, as former SAS soldier Ant Middleton’s suggests; “fuck Covid-19”, a statement that he, in fairness, has now retracted.
Read MoreI promise that I will not do an explainer of the VIX this week. Instead, I will lead with some observations on markets and finish with a war-story from the world of retail investing. The return of equity volatility has engendered two responses. Firstly, it seemed as if investors breathed a sigh of relief on Monday when it became clear that we could peg the swoon to the blow-up of short-vol ETFs and related strategies. It is always scary when markest fall out of bed, and even more if so if we can’t explain why. Blaming excessive risk-taking in short-vol strategies assured that the sell-off, while painful, would be short. Secondly, every strategist note that I have subsequently read—and comments from policymakers—have echoed this sentiment. A sell-off was long overdue and is perfectly normal. There is nothing to worry about, and underlying economic fundamentals for risk assets remain robust. Many have even welcomed the volatility as a sign of healthy markets. I have no particular reason to disagree, but my spider sense tingles when investors and strategists welcome a 10% puke in equities. I understand that macro traders are excited but real money and long-only? The logical response from markets would seem to be: “Oh, so you think you’re tough?”
Read MoreGoogle informs me that the advice to "sell in May, and go away" comes from the tradition of British merchant bankers—I presume in the 19th century—to leave London for the country side in May and come back on St Leger's Day in September. I am partial to a good anecdote, but does it work? In order to check, I ran a little study using the S&P 500 going back to 1991. The first chart below shows the returns you would have foregone by selling in May and waiting 35 weeks and 17 weeks, respectively, before buying back. I have included both mean and median returns, because the outliers can skew the former when your sample size is not large. The second chart shows the results of a strategy which shorts the S&P 500 in May, buys the first week of October, and holds until year end.
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