Equities have crashed. Geopolitics are scary, Trade wars are scary, Credit concerns are scary, Italy is scary, Economy is scary, but these are already known unknows. That is why the markets have sold off sharply and volatility has exploded. These are all yesterday’s news.
Markets look forward and constantly look for new themes, what has happened has happened, and will probably give small aftershocks, but we need to focus on what is next?
Has the economy really changed lately? Growth is slowing a bit, but this is not why the markets have sold off.
Is the market cheap? Nobody knows, but how we price earnings has changed during this last correction. Earnings and markets are two different things, at least in the short term.
People still love to talk about China and their imploding equity markets. Surely, China is a huge economy that affects us all, but there is no correlation between the Chinese equity markets and the developed world equity markets. SPX versus the Chinese ETF FXI.
We are not saying to go “all in” bullish here, but the theme over past weeks we have been arguing about, first that people were too complacent, where we suggested VIX and volatility as an asset being too cheap as the crowd was seeing no risks, and lately that the crowd has got too scared and price moves that most probably won’t be as bad as people seem to perceive them.
We simply believe the crowd has reached a short-term max scare moment and that this will ebb out, resulting in falling volatilities and less crazy markets for the short term.
Why not use the scary costume for the last trick or treat tonight, and then put it back to rest at least for the short term?