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Despite Rising Stock Prices, A Fear Trade Mounts

By Michael KramerMarket OverviewMay 22, 2020 06:09AM ET
xhaszzx.com/analysis/despite-rising-stock-prices--a-fear-trade-mounts-200525417
Despite Rising Stock Prices, A Fear Trade Mounts
By Michael Kramer   |  May 22, 2020 06:09AM ET
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This article was written exclusively for xhaszzx.com

Very quietly, safe-haven assets have been rallying, and in some cases, to prices not seen in years. The big rally in assets like gold have come despite a massive rally in the equity market. While some investors will think the sudden surge in gold is due to expectations of rapid inflation, it seems more likely that the push into gold has more to do with the safety the precious metal offers.

One reason why investors may be in search of safety is that the Volatility Index (VIX) remains at stubbornly elevated levels around 30, a level suggesting equity markets are still volatile. That volatility is expected to stay high based on the VIX term structure, which is currently suggesting that the VIX index will remain high for many months to come.

Given the inverse relationship between the VIX and the equity market, it likely means stocks will be in for a wild ride over that same period. 

Gold Futures
Gold Futures

Inflation Expectations Are Low

Believe it or not, gold prices have reached levels last seen in the year 2012. The recent surge in gold started in March, as equity prices and risk assets were tanking. But gold’s strong move higher has continued despite the massive rebound in equity prices since the March lows. The move appears to have more to do with investors seeking safety rather than rising inflation rates from the Fed’s massive quantitative easing measures.

Looking at inflation gauges, such as 5-year-5-year forward inflation expectations, they're at some of their lowest levels since 2003, with only the period during 2008 and 2009 providing lower expectations.

5Y-5Y Forward Inflation Expectation Rate
5Y-5Y Forward Inflation Expectation Rate

Additionally, the U.S. dollar has been remarkably stable if not stronger during the whole pandemic period, also signaling that inflationary pressures are not likely to be a factor in the near-term. It leaves the current move higher in gold, at the hands of those looking for a safe haven to park their money, potentially a sign investors fear more stock market volatility.

The VIX Index Remains High

Based on the term-structure of the VIX, it seems to confirm the notion that volatility is likely to stay elevated for the foreseeable future. According to data from VIX Central, the VIX index is currently expected to remain above 30 until November. That would take us right into the U.S. presidential election, after which the VIX is expected to fall to around 29 through the new year.

VIX Term Structure
VIX Term Structure

Sharp Drawdowns to Come?

These expectations would suggest that the equity market could easily see some very sharp drawdowns over that period. It seems to indicate that despite the massive rebound in equity prices and risk assets, all may not be smooth sailing. The rising costs of gold and expectations for an elevated VIX index seem to indicate that investors are still expecting volatility to remain very high in the equity market and that we may not see those volatility levels settle down until some time in 2021. The fear of these severe drawdowns may very well be the underlying reason why investors have been flocking into assets like gold.

It may very well be the case that as long as the coronavirus pandemic remains, investors could stay fearful and ready to scramble at the first sign infection rates are beginning to rise or the economic recovery is stalling. Until a time comes that the virus is only a distant memory, we can expect volatility to remain high, and for investors to continue to pile money into safe-haven assets.

Despite Rising Stock Prices, A Fear Trade Mounts
 
Despite Rising Stock Prices, A Fear Trade Mounts

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Comments (9)
Ashish Bhura
Ashish Bhura May 22, 2020 11:52AM ET
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No useful info
John Patrick
John Patrick May 22, 2020 9:35AM ET
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The Fed is the only one causing stocks to rise so your article is moot
Obed Mokgotho
Obedience May 22, 2020 9:35AM ET
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True
Robert Dziadkowiec
Robert Dziadkowiec May 22, 2020 9:35AM ET
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Absolutely true,
TAMER EL HADY
TAMER EL HADY May 22, 2020 8:10AM ET
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Do you think emerging market Equities have more upside than U.S equities ?
Romulo Burgos
Romulo Burgos May 22, 2020 8:09AM ET
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this thing can get ugly after July 31st when many of those 37 million unemployed can not find a decent job and services in all sectors slow down significantly.
Tommy Mills
Tommy Mills May 22, 2020 7:50AM ET
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I didn't know money was piling in to safe haven assets. Is it new money, is the money moving from stocks and ETFs?
Diddl One
Diddl One May 22, 2020 7:01AM ET
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What do you mean by "continue to pile money into safe-haven assets." ? Any numbers?
Alan Kaid
umadbro May 22, 2020 7:01AM ET
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Gold is generally seen as a safe haven during turmoil in equity markets, like today. The dollar can occasionally be a safe haven from equities, too, when the right domestic policies and global situations happen.Look at charts for gold and the dollar index (make sure you have volume added below the charts). They are doing outstanding, but gold historically will typically move lower as investors move their money from gold back to equities. Since equities have risen significantly from the bottom and gold prices have also continued to steadily increase, we can assume that investors are still fearful of a short-term and long-term recovery. Likewise, the author is backing up those claims with the VIX (which is inverse of equities), since the VIX is still at elevated levels and its futures indicate expected future volatility.
Adarsh Shettigar
Adarsh Shettigar May 22, 2020 7:01AM ET
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In addition to gold and dollar index (as very well explained above), the performances of CHF and JPY (safe-haven currencies) lend further support to the point.
Abdul Ati Asani
Abdul Ati Asani May 22, 2020 7:01AM ET
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Alan Kaid  Thank you
Ioannis Lazaridis
Ioannis Lazaridis May 22, 2020 6:46AM ET
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Eccellente article.
Ross Dre
Ross Dre May 22, 2020 2:23AM ET
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I appreciate your perserverance, Mike! I do believe you’re playing the right side of the chart. It would be foolish to ignore fundamentals!
Ross Dre
Ross Dre May 22, 2020 2:23AM ET
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Signed rossimac stocktwits.
Robert Dziadkowiec
Robert Dziadkowiec May 22, 2020 1:45AM ET
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I need 12% correction.
Ryan Reed
Ryan Reed May 22, 2020 1:45AM ET
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That’s it?
 
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