It's Not Over

The Whipsaw Was Real

On Monday, the markets looked like they were in full-blown panic mode. The S&P 500 dropped 4% and small-caps fell 5.5% right at the open. The VIX shot up to 65 in one of its biggest single day spikes ever. After that, investors seem to calm down a bit. There was an understandable bounce following the sell-off. The VIX came back down. Credit spreads came back down. The yen seems to have steadied itself in the mid-140s. In terms of investor sentiment, there’s a sense that “OK, that sucked, but now we’re getting back to normal.”

I go online and I see a lot of folks getting bullish again, but here’s the thing. I don’t think volatility is anywhere near done. The alarm that ignited the violent reaction in equities in the first place may have settled for now, but the underlying conditions haven’t. The soft landing, which most people have taken for granted, seems to now be at least in some question given the acceleration in unemployment and the lack of central bank response. The Bank of Japan tried to normalize monetary conditions, which triggered this whole episode in the first place, and they’ve completely walked back any sense of hawkishness once volatility took off. In the end, we’ve still got a Fed that looks like it’s behind the curve again. We’ve still got a BoJ that finds itself in the incredibly tough spot of trying to manage inflation risk and avoid recession at the same time. In many ways, conditions have gotten worse over the past few weeks, but a lot of people have seen market volatility calm in the past few days and gone back to underestimating some of the current tail risks.