S&P 500 Forecast Isn’t the Only Benchmark Facing Stark Volatility Risk Ahead

0


S&P 500, Bitcoin and Dollar Talking Points:

  • Both the S&P 500 and Dollar leaned against critical breaks – bearish and bullish respectively – this past week which suggested moderation
  • The market’s restraint belied the molten mix of overlapping systemic fundamental issues building anxiety but leading to hesitation
  • Political risks were already an enormously disruptive force, but news of President Trump’s Covid diagnosis managed to escalate it even further

Political Risks Will Remain Top Prospective Market Risk

Never a dull moment in 2020. This past week was defined by competing systemic fundamental themes vying for the market’s attention. Ultimately, the approach of the US election event horizon proved the dominant concern through this past period; and the immediate outlook suggests the chaotic election cycle will continue to hold firmly to bridle of volatility and risk trends. Through the past week, the scheduled event risk around the election process was already unsettling as it was. The first Presidential debate added to the bedlam. Yet, the markets were ready to track onto a different and more directed theme – which seemed a loaded course with NFPs on tap – until the news hit Friday morning that President Donald Trump had contracted the coronavirus. With a 17-hour gap on his Twitter feed (Trump’s preferred medium of communicating to the world), concern was building. However, a few hours after the close of New York markets, the President released a video relaying that he felt fine and that he was going to Walter Reed Medical Center for treatment and observation.

{{GUIDE||EQUITIES}}

Chart of S&P 500 with 50 and 100-Day Moving Average and Gaps (Daily)

S&P 500 Forecast Isn't the Only Benchmark Facing Stark Volatility Risk Ahead

Chart Created on Tradingview Platform

As of Friday, night the US President seemed to be in good spirits and good health. However, the risks associated with the virus are serious even if the probabilities of his full recovery are very good. The risk attributed to an unfortunate turn in the Leader of the Free World’s health is so significant that even a low odds scenario would be taken seriously by market participants. Given the stretch of risk assets relative to the projected growth forecast and rate of return in capital markets, the ‘reward’ in a relief rally reverting to the status quo is relatively tepid. Alternatively, a further cast of pandemonium should the 25th Amendment (transfer of power) be evoked could readily represent a US – if not global – risk catalyst. Headlines over the coming week to the health of the US President will thereby be critical. And, while the markets are closed over the weekend, macro watchers can monitor Bitcoin and the broader crypto market as they trade 24/7 (download our Introduction to Bitcoin guide).

Chart of Bitcoin BTCUSD Overlaid with S&P 500 (Daily)

S&P 500 Forecast Isn't the Only Benchmark Facing Stark Volatility Risk Ahead

Chart Created on Tradingview Platform

Looking Beyond the President’s Quarantine

Trump’s contracting Covid-19 is itself unlikely to alter the government’s position on acting preemptively to curb a resurgence in the transmission curve. The interest in supporting the recovery for the flagging economy seems to remain a priority. The surprise of a world leader is also unlikely to change the voting intentions of the American electorate. That means that the campaigning will likely revert back to those more fundamental of drivers in steering political outcomes. The health of the economy and markets is perhaps one such seismic factor. Here too, the potential for a sudden renaissance for the US is very low with sentiment already stretched for optimism while the pitfalls are worryingly numerous.

Chart of DXY Dollar Index Overlaid with Trump-Biden Crypto Ratio (Daily)

S&P 500 Forecast Isn't the Only Benchmark Facing Stark Volatility Risk Ahead

Chart Created on Tradingview Platform

Alternatively, looking beyond the boarders of the United States, the coronavirus remains of global risk. The rise in cases in London, Madrid and St. Petersburg is pushing records and leading leaders to reconsider their economic versus public health policy balance. This is absolutely a global risk of an implausible V-shaped recovery collapsing before our eyes before the pain of the fastest recession on record has been cleared. This can also act as a relative value consideration as with pairs like EURUSD, GBPCAD and USDCNH. Yet, it isn’t clear whether markets will favor a faster reduction of the curve or a few more basis points GDP.

Chart of the Worldwide Confirmed Coronavirus Cases

S&P 500 Forecast Isn't the Only Benchmark Facing Stark Volatility Risk Ahead

Chart Created on Google with Data from Wikipedia

Market Conditions and Core Fundamentals

As we move into the month of October, it is worth reiterating the typical circumstances to market participant and activity. Historically, this is a month that sees volatility hit its peak – at least when averaging out calendar months’ volatility level for the VIX back to when it first started pricing. In addition, this is the same month that seems the baseline S&P 500 average out its heaviest volume of the year. While the additional of election anticipation can create some serious distortions, it will be difficult to restrain such pressured markets.

Chart of Monthly S&P 500 Change and Volume with VIX (Monthly)

S&P 500 Forecast Isn't the Only Benchmark Facing Stark Volatility Risk Ahead

Chart Created by John Kicklighter, Data from Bloomberg

Many of the developments that pose a serious risk of volatility moving forward are headline-oriented or otherwise prone to unexpected development without a clear catalyst on the horizon. That said, data-based economic considerations are still of great importance. The health of the world’s largest economy (and the world’s economy) is of critical importance for investment potential. Unfortunately, there are few indicators with the magnitude to definitively change the masses’ expectations while offering a timeliness. Yet, as far as it goes, the September NFPs (nonfarm payrolls) is the upstream health of the globe’s largest aggregate source of consumption, the American consumer. Another 661,000 jobs added seems remarkable but it is less impressive when we consider how many jobs lost since February are still off the books.

Read more on the importance of the nonfarm payrolls in our new education module!

Chart of US Total Payrolls and Distance from Record Highs (Daily)

S&P 500 Forecast Isn't the Only Benchmark Facing Stark Volatility Risk Ahead

Chart Created by John Kicklighter, Data from Bloomberg

Building Confidence in Trading

Building Confidence in Trading

Recommended by John Kicklighter

Building Confidence in Trading

If you want to download my Manic-Crisis calendar, you can find the updated file here.

.





Source link