The Market: Volmageddon is Here
The Market: Volmageddon is Here
Israel-Hamas was the spark on the gasoline-soaked kindling the Fed and soft landing economic and market bulls have been piling up for over a year. Buckle up.
Discussion
On September 24 I said that Volmageddon’s hand was on the door, and on September 28 I said that Volmageddon had opened the door while asking the question of whether it would step through. SPX went on to make a minor new low at 4216 on October 3 versus 4239 on September 27, but VIX never broke 20 on the upside and SPX quickly snapped back to almost 4400 by mid-October. Hardly a 2018-like Volmageddon event that takes the VIX well above 30 in a matter of days.
But now it’s here.
All the ingredients for a Volmageddon event have been in place for weeks now following a year of the Fed aggressively fighting soft landing economic and market bulls. As I’ve said from the very beginning of the Fed’s tightening campaign, the longer and harder the market fights the Fed, the worse the ultimate downturn because the Fed will need to take rates that much higher to force economic activity and markets down to a level that brings inflation durably back to its 2% target. And that is EXACTLY what has happened.
Now we’re in the process of reaping the hideous consequences. You don’t take UST 30s from a post-GFC average of 304 bps to 515 in less than two years, in a highly levered system, and keep fully valued equities pinned just below ATHs. That’s not how economic and financial gravity works.