We’ve taken a fair number of actions lately. Some of that is just due to the ratings cycle I go through – periodically taking a fresh look at stocks and deciding to change some things. Another reason is a view that volatility has increased. I don’t just mean the volatility index VIX, but intramarket volatility as well. For instance, commodity stocks were killed in the first two months, but now they’re among the top performing stocks on the year. To deal with some of these rapid changes in fortune, it makes sense to trade more often than we normally like to. The third reason is that there are a number of unlikely, but possible, events coming up that we want to be positioned for.
First up is the Fed meeting tomorrow. Most people think that the latest jobs data will dissuade them from doing anything. I’m not so sure. I’ve seen the poor jobs data dismissed as a ‘one-off’ (even though it clearly isn’t.) I’m not great at figuring out what the Fed will do, but what I’d say is that most people now attach a pretty miniscule chance to a rate hike, which to me means the payoff of the contra position is pretty attractive. If they raise rates, no one is positioned for it (I think the most reasonable way to have this position is with cash.) If they stay pat, that’s what was expected and I’m not sure we’ll see anything lastingly change.
Next is the BoJ (Bank of Japan) decision, which is probably the least important of the three. Again, consensus is that they’ll be pretty dovish. I have no great insight on this one, but I will note that we’ve seen more talk even from the BoJ of how Abenomics has been ineffective. If they’re more hawkish that’s a negative, whereas the expected dovishness shouldn’t be so big a deal.
Last is Brexit. I, along with most people, didn’t expect this to happen, but I have to admit that the polls have been heading in the direction of Brexit of late. I’d still bet that Brexit won’t happen, but that’s pretty much flipping a coin, so I wouldn’t take too much from that. If Brexit doesn’t happen, we’d probably benefit from our European holdings, but I’m not sure it would be such a big deal for most assets (I suppose if we were a macro hedge fund we could try shorting Bunds or something.)
Backstopping our positioning is the data. The events above are potential accelerants to what can happen, or short term influencers (more of the same isn’t much of a catalyst). What’s more important is the data, which has been poor and is likely to trend that way for a while. The earliest that could change is about September. Until then, I try to do everything for a good reason and the data continues to trend in an overall softer direction. Thus we remain cautious and look for opportunities. Maybe what happens during the rest of the week will start to provide opportunities, but for now we do what we always do- try to go with the best risk-reward investments.