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If you told me last month that people would be taking a -4% drop and a 40 VIX in relative stride, I would have thought you were delusional. Yet this is what happens when volatility that once seemed eye-watering becomes normalized.
Last week's activity was not quite as crazy as some of the last few sessions. That is why people are not overtly freaking out. The time for that has passed. That said, because it can take a while for liquidity to return to normal after a period of outsized moves, it is important to remember that volatility begets volatility.
There are many takeaways from this week’s drama. Here are a few:
- If yesterday’s announcement wasn’t indeed the “Trump Put”, it seemed an awful lot like one.
- We need to pay attention to Truth Social. I’d imagine that news-reading algorithms are being programmed to do that right now, if they weren’t already.
- The bond market really does rule.
- FOMO continues to reign supreme. No one wants to miss THE rally. That’s why bear market rallies are short, sharp, and ferocious.
- Remember that volatility works in both directions. When we go down, it’s scary and abnormal, but when we go up it’s “socially acceptable volatility.”
Regarding the so-called “Trump Put”: we have to wonder if its effects have a lasting effect. The President’s comments about a tariff pause for most of the world certainly reversed the market’s mood yesterday, and did so quite abruptly. But as I type this, most of those gains are in the process of being erased. If that was the Trump Put being exercised, it appears that the benefits are fleeting. On March 24th, we wondered whether some conciliatory comments about tariffs in the prior trading session represented that “put” in action. We offered two pieces of evidence that it might have been interpreted as such but said that there was no proof to that effect. With hindsight, it seems as though it was indeed a bona fide effort to ease the market’s mindset, but bear in mind that the S&P 500 (SPX) was about 10% higher then than now.
As for the bond market: it was clear from the President’s and Treasury Secretary’s comments that concerns about the bond market were an important impetus for yesterday’s policy adjustment. A stock market decline is never pleasant, but stocks can fall without causing systemic damage. That is why we once again offered the reminder that the “Fed Put” is about financial soundness and liquidity, NOT the stock market. If the bond market got bad enough that it threatened banks and disrupted the market for Treasury securities, that could have forced the Fed to react. A selloff in stocks that threatens neither the broader financial system nor economic output will not cause that piece of the cavalry to ride to the rescue.
And as for “socially acceptable volatility”, keep this in mind: if markets had instead fallen by the amount of yesterday’s rally they would have triggered market-wide circuit breakers. The first one is triggered by a -7% fall in SPX. Yesterday we rose +9.5%. The financial system understandably prefers when markets rise.
As I type this, we now have SPX about -6% lower and VIX at 50. The change that we saw in the past couple of hours would alone have caused no shortage of handwringing. But for now, we recognize that volatility begets volatility.