MY HOT TAKES:
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Markets aren’t reacting to risk––they’re ignoring it.
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We’re in a low-volatility lull that’s usually followed by a spike.
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The extension to August 1 is not a solution––it’s a ticking clock.
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This rally has been built on hope and extensions.
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The roller coaster metaphor isn’t just cute––it’s a real warning.
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You can quote me: “When the flag’s in sight at the top of the roller coaster––you know what’s coming next.”
Up, down, to, fro: NO! Do you remember your first roller coaster ride? I was still in short pants and probably in the single digits. I could still remember the smell of salty night air with a slight hint of tar coming from the boardwalk. It was late and time to leave. I was still on a respectable sugar high from saltwater taffy, and then the offer came. My dad offered to let me go back to the arcade (which at the time only had pinball machines and ski ball–pre Pacman), IF I would ride the Galaxy rollercoaster. I turned him down for weeks, but eventually I mustered the courage. I handed the ride operator my ticket and was soon strapped into the car. It all happened so fast; the ride was underway before I had a chance to bail. Too late–the cars were locked into the long and slow ascent. Click…click…click…click. There was no turning back and my heart was pounding in my chest. I could faintly make out the top. I was terrified.
The S&P 500 and the Nasdaq are at their all-time highs and the Dow is really close. The Big Index (my pet name for the S&P) is up by 6.7% for the year and 12.5% ahead of where we were a year ago. On the surface, that seems decent, but if I told you that we closed 26% higher than the index’s April 8th low, you would surely be impressed. If I reminded you that we are on the brink of a global trade war with earnings season around the corner, weak-ish employment, a growing deficit, and a confused Fed, you may be… well, amazed, maybe even dazzled. Do you feel your heart beating in your chest? No? Neither does the market.
The VIX Index, also referred to as the “fear gauge,” closed at 15.8 yesterday. That is only slightly higher than its year-to-date low, briefly touched in February. For some reference, it spiked to 52.3 in April. Yeah.
It was in April that the President astonished markets with his reciprocal tariff plan that included numbers never seen nor fathomed, with a list of countries that was so broad-reaching, that it included ones that were uninhabited. It was huge. Markets went on a downtown excursion where there was little oxygen to breathe. Ultimately, the President announced a delay and the desire to negotiate. Though later than hoped for, it was welcomed with open arms by traders. We now had until July 9th to get it all sorted.
Markets climbed. Click…click…click…click. One two and three framework deals were signed. More were promised. Click…click. New restrictions were threatened, then eased, still more became effective. Economists waited impatiently for signs of inflation. Minor gains in durables prices, but nothing really ever fabricated. Economic slowdown? Yes, indeed, a quarterly decline in GDP, but largely due to a temporary trade imbalance. Sentiment was obliterated but rose from the dead. Click…click…click. Markets climbed further yet, finally making record highs in late June; the last highs prior, came back in February. A pullback was sure to come, but did not. Click…click. July 9th approached with still only three signed deals. A last-minute extension through August 1st would save the day. Less than a month to get things in order.
The President said “no more extensions,” raising the stakes. Markets continued to climb. Click..click. 21 letters with a rough average of 30% tariffs went out. A copper tariff was introduced along with the suggestion of a 200% (!) tariff on Pharmaceuticals. The market climbed further. Click…click. Brazil was hit with a punitive tariff. Click…click.
I already mentioned it, but earnings season is fast approaching. EPS growth for the S&P is expected to be around 6.5%, the lowest since 2023, and about ½ of last quarter’s EPS growth. And here we are. Have a quick look at this chart then follow me to a quick close.
This is one of my favorite charts. It details implied volatilities from 1 month options. Here, I plotted the S&P (white line), the Nasdaq (orange line), and NVIDIA (green line). NVIDIA deserves to be on this chart because it is a $4 trillion company and the largest allocation in both indexes. What you should take away from this chart is that these three high-climbers are right near their lowest volatility since the President was inaugurated. Here is the thing about volatility, it gets really low just before it pops up. Low volatility can be looked at as investor complacency, especially given the collection of stressors weighing on the markets. WHILE YOU SLEPT, letter 22 went out to Canada upping its tariff to 30%. Click…click…click…click.
With every click and inch, the roller coaster climbed, it got closer and closer to the zenith. I could just make out the flag at the top, waving in the evening breeze. I had no idea what was on the other side, but I knew that it was going to be fast and bumpy. Click…click…click…click…click.
YESTERDAY’S MARKETS
Stocks climbed to fresh highs as trade tensions tightened. Good news from Taiwanese chip manufacturing behemoth TSMC boosted techs which helped spark a broader rally. 10-year yields ticked slightly higher, and Bitcoin hit a new high, because–no reason.