Balancing Optimism and Caution
During the September 2024 Investment Committee meeting, members shared a collective sentiment of cautious optimism toward the current market landscape. Investor appetite for risky assets appears to be increasing, as many now believe a “soft landing” scenario is the most probable outcome for the economy. This belief has spurred increased risk-taking, despite ongoing geopolitical tensions and macroeconomic uncertainties.
Market Resilience Amid Volatility
One of the standout themes discussed was the market’s ability to rebound from significant volatility. Specifically, members highlighted how quickly the markets recovered after a notable volatility shock in early August 2023. At the time, fears over Middle Eastern conflicts and recession concerns in the U.S. sent the VIX index spiking to 65%. By the time of this meeting, the VIX had dropped back down to 15%, reflecting improved investor sentiment. This 4-day drop in the VIX marked the third-largest such decline since 1990, surpassed only by the collapses witnessed during the 2008 Lehman Brothers crisis.
The Committee reinforced the strategy of “buying the dip” when volatility spikes disrupt trend-following strategies. History has shown that some of the most significant market gains follow periods of heightened volatility, reaffirming the importance of disciplined, long-term investing.
Navigating Political Uncertainty and its Impact on Markets
Looking ahead, the U.S. presidential election is expected to become a central focus. With President Biden exiting the race, the field has become highly unpredictable, increasing the likelihood of market fluctuations. Committee members acknowledged that the probability of different outcomes has shifted dramatically in recent weeks, leading to continued support for an event premium in the market.
Volatility is expected to remain elevated during this period. Historically, volatility indicators like the VIX tend to remain high in the lead-up to the U.S. elections, and this cycle appears no different. The Committee anticipates market autocorrelation to remain flat, as evidenced by the significant long gamma positioning in the S&P 500, currently at approximately $4 billion.
Conclusion
As we progress through 2024, the Committee’s view is that markets will continue to exhibit a slow but steady grind higher, punctuated by pockets of volatility driven by macroeconomic data releases and political events. While the outlook remains cautiously optimistic, the Committee maintains a conservative stance, prioritizing risk management and capital preservation in the face of potential geopolitical shocks and election-driven volatility. This backdrop reinforces the importance of tactical flexibility, and the Committee is committed to a disciplined approach to capture upside while mitigating downside risks.
Authors: John Couletsis and Kostas Metaxas