Any idea what the “Greenspan Put” might be? No? Well here are a couple of hints: Greenspan refers to a rather loquacious former Fed Chief named Alan; “put” refers to contractual obligation giving its holder the right to sell an asset at a particular price. So what do you get when you put the two together? We didn’t guess “monetary policy” either.
The CBOE Volatility Index (VIX) measures the implied volatility of options on the S&P 500
True enough, the term refers to the fiscal approach that the Greenspan Fed exercised from late 1987 to 2000, specifically injecting liquidity into the markets whenever things got a little tempestuous. Over time, investors came to expect the central bank would protect them against losses in a crisis, i.e., a virtual “put” protection on asset prices.
The VIX is seen as Wall Street’s “fear gauge” because it ticks higher when investor anxiety levels are on the rise
At this hour, investors have come so far in that expectation that complacency has descended on the U.S. stock market. And not just a little…between the summer lull in trading and super-easy global monetary policy, the past 30 days have been the least volatile of any 30-day period in more than two decades. Indeed, actual volatility has fallen to levels seen only a dozen times in the past half-century.
The VIX just dropped to levels last seen in the summer of 2014, before panic buying of bonds in October
The tranquil market has led some to worry that a market storm may be brewing. It’s true that policy makers are likely to step in every time disaster strikes, but disasters still strike. They say the time to buy insurance is when its cheap. For the U.S. stock market, that might be now.
What the markets have been doing…
Stocks ended mostly lower for the period, in large part due to worries over an imminent Fed rate hike. Volumes were light through most of the two-week stretch — Monday was the second-slowest trading day of the year — as investors waited for Fed Chair Janet Yellen’s speech at the central bankers’ annual confab in Jackson Hole, Wyoming. Following her remarks, stocks rose in response to the Chief’s favorable assessment of the U.S. labor market, only to tank as investors figured out that better conditions strengthened the case for a rate increase in the coming months.
On the economic front, the Commerce Department announced that new home sales had surged 12.4% in July and reached a nine-year high. Housing demand appears to be running well ahead of new home construction, suggesting a pickup in homebuilding in the coming months.
|Index||Friday’s Close||Two-Week Point Change||Year-to-Date Change|
Treasury yields went mostly sideways as investors anticipated that the Fed would raise rates as soon as its next meeting in September On the corporate side, both the investment-grade and high-yield spaces slogged through light trading and new issuance. Munis experienced strong demand for new issuance as cash flows into the asset class remained positive and the new issuance calendar stayed relatively light. The coming week’s issuance stood to be even lighter as the U.S. headed into the Labor Day weekend holiday.
|Fixed Income||Yield||Two-Week Yield Change|
|30-Year Municipal Bonds||2.15%||-(0.02)%|
How do you hedge a hedge fund?…
Redemptions for the entire hedge-fund industry totaled $20.7 billion over the three months through July, $6.6 billion out of long/short funds just last month
Quote of the Week…
“There are limits to what monetary policy can and, indeed, should, do.”
John Williams, president of the Federal Reserve Bank of San Francisco
Number of the Week…
The combined net debt of Exxon Mobil, Royal Dutch Shell, BP, and Chevron — more than double their debt levels in 2014
What Fund Architects has been doing…
Absent something extraordinary, we plan to be making a few trades as the first of September rolls around. As we indicated last period, the technology sector is likely to be on the buy side for us, with our current position in healthcare likely to be liquidated. The particular security we’ll use to implement the move will be the iShares Global Tech ETF (IXN).
It’s been quite a while since the Fund Architect Portfolios have included technology, in no small part due the sector’s volatility. That the space has been rather subdued over the last couple of months has helped it move to the top of our rankings.
Large-cap U.S. equities are also still attractive, and we’ll likely hold our SP500 position. The broad market has been unusually quiet of late, and there are plenty of market watchers who consider that a harbinger of bad things to come. We’re not too worried, as our ability to adjust the portfolios gives us confidence to stay the course in uncertain times.
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