Volatility (from the Latin volatus with suffix). Feminine noun. 1) Fast and pronounced fall, which normally begins immediately after buying on the wave of an apparently convinced and convincing rise. 2) Strong market rebound, generally immediately following the moment in which, after a sharp fall, you get scared and sell. Divergence (from the modern Latin divergere, in use since the XNUMXth century). Feminine noun. Movement in different directions of entities having in common the starting point. Drag the market you just bought down and all others up.
Strategy (from the Greek strategy, derived from strategos). Feminine noun. Military operations science and, by extension, portfolio science. Ex post rationalization of choices made on the wave of basic impulses (enthusiasm, greed, fear, panic). It is generally long-term on the part of the portfolio that is losing. Welcome to the new phase of the market, nervous and neurotic, but still unable to produce evident, generalized and irreversible damage.
In the span of less than a month we were able to relive all the great fears of the past few years. The sudden resurgence of inflation, the possible loss of control of the situation by the central banks, the end
anticipation of an expansive global cycle that we believed to be long-lasting, the Eurozone crisis and the risk of its
disintegration. And then geopolitics, the sanctions, the accelerated deglobalization which risks joining the secular stagnation and turning into a long depression in Europe.
Tuesday's U.S. inflation reading, a modest 0.1 vs. worrying four-month series
previous ones, it was like the blessed sound of the alarm clock ending a messy night of bad dreams and bringing us back to a normal reality. The SP 500 is at an all-time high from a month ago and appears in good spirits, what more could you want? And yet, looking closely, something must have happened during the restless night. And so, while having a coffee to try to wake up completely, it turns out that the night storm has half flooded the living room, while the wind has thrown up and messed up those sheets of notes we cared about so much.
And the Dax, 7 percent smaller than five weeks ago, and the Italian index, which lost 13 percent in an instant, find themselves crumpled in a corner. In short, the August storm in the American version gives way to a clean sky and a terse (albeit partly deceptive) light. In the European one, it leaves a trail of disorder and malaise. In America today the fears about impending inflation sound instrumental and politically motivated. At 0.1 on Tuesday, the clock goes back six months, when we worried about prices that were too low, not too high. Bonds and shares rediscover the polish and vigor of youth, much more than a month ago, when they appeared tired and full of doubts.
In reality, things are more complicated. Painstaking work by Kris Dawsey of Goldman Sachs shows that the surge in prices in recent months was confined to a few sectors (particularly airfares) that have quickly deflated in recent weeks. Having said that, notes Dawsey, it is undeniable that the underlying trend in the generality of prices is slowly but steadily upwards. The market got worried too early in August, but it didn't make a complete mistake. In Europe the mistake was probably the opposite. The markets, lulled for months by the narration of a now solid recovery, gave too much weight to a disappointing second quarter. In fact it is likely the third
quarter, Ukraine permitting, lead to a small economic recovery.
The ECB, for its part, will be very active and will declare its willingness to implement quantitative easing towards the end of the year. For European stock markets, therefore, it is not unreasonable to assume a recovery in the coming months. Where the markets didn't
Another mistake in selling Europe is in the perception of the structural unsustainability of the European model. There
German stubbornness in demanding austerity and Franco-Italian stubbornness in avoiding structural reforms produce a bleak end result. The ECB remedies how it can and must proceed with the emergency brake pulled by German hands. After all, even the most expansive monetary policy can buy time and cushion the structural problems, but it cannot solve them.
Devaluing the euro is the most obvious and easiest emergency measure. The moment is favorable. The weaker euro helps push up too low European inflation. The stronger dollar helps to curb US inflation which, as we have seen, tends to rise in any case. America doesn't like a strong dollar, but at this stage it can accept it less reluctantly than usual. The volatility of recent weeks has therefore been exaggerated, but it prepares us for a more difficult phase, from 2015 onwards, in which the rise in US rates will complicate things. The economic and stock market divergence between Europe and America will partially recover, thanks to the weak euro which will help European profits and penalize American ones, but on a structural level it will remain intact and will therefore be ready to resurface at any time of difficulty.
The strategy between now and the end of the year will be to adjust portfolios to the coming years of volatility. Equities will need to be lightened calmly, taking advantage of the highs in America and waiting for Europe to recover towards the end of the year. Bonds will gradually be concentrated on the most solid debtors. Duration will matter, but quality
will have even more. The more dollars you want to keep, the better.
