Markets with High Uncertainty
How can I effectively navigate markets with high levels of uncertainty?
The U.S. economy is grappling with the possibility of a recession, which is widely anticipated to be mild. It is believed that President Trump views such a mild recession as advantageous for the economy, as it could lower bond rates and revitalize the struggling housing market by making home purchases more accessible. This outcome would likely be framed as a significant economic achievement.
The current combination of geopolitical shifts, tariffs, and macroeconomic uncertainty risks leading to a weaker USD and lower yields, but this may come at the cost of economic growth and stock market performance.
While some stakeholders in the economy may view tariffs as necessary, the negative impact on the U.S. supply chain caused by these tariffs is particularly concerning. While we acknowledge that some of the recently discussed tariffs have merit, we believe their scale and the uncertainty surrounding them are contributing to economic distress. We are especially concerned about potential debt issues if the recession turns out to be severe rather than mild or moderate.
In this post, we want to share our strategy for navigating our portfolio through these particularly turbulent times ahead of the tariff announcement this Wednesday. Following our analysis of the macroeconomic landscape, we will discuss our portfolio strategy. This includes our tactical trades that we are implementing specifically for this week.
First of all, we are revising our risk assessment from a level of 4 to -1.
S&P 500 and USD
When both the S&P 500 and the U.S. dollar decline simultaneously, the implications depend on the underlying causes and the broader market context. Here’s a breakdown of potential scenarios and effects:
Risk-Off Sentiment: A simultaneous drop in both S&P 500 and USD often signals a broad risk-off environment, where investors flee equities and the dollar due to geopolitical tensions, economic uncertainty, or policy instability. The phrase "investors flee equities" refers to a situation where investors sell off their stock holdings and move their capital into safer asset classes, such as bonds, gold, or cash. This typically occurs during periods of economic uncertainty, market volatility, or declining confidence in the stock market's performance. After 2008, the Eurodollar system experienced a massive expansion and has continued to grow ever since. Simultaneously, the U.S. aggressively absorbed global trade surpluses, positioning itself as the central hub for global financial flows into Treasuries and U.S. stock markets.
Foreign Demand Shifts: The dollar’s decline can reflect reduced foreign investment in U.S. assets, which may exacerbate equity sell-offs. Historically, a weaker dollar correlates with lower demand for U.S. stocks, though this relationship isn’t absolute.If major foreign investors in U.S. markets choose to withdraw, it could trigger a downward spiral effect.
GOLD
Economic turmoil significantly influences gold prices, often driving them higher. During periods of economic uncertainty, such as recessions, geopolitical tensions, or financial crises, investors turn to gold as a "safe-haven" asset. Its historical stability and lack of correlation with other financial assets make it an attractive option for preserving wealth when confidence in traditional investments like stocks or currencies declines. Investors often sell off riskier assets like equities and move their capital into gold, further driving up its price. This countercyclical behavior is a hallmark of gold's role as a crisis asset. Unlike fiat currencies, gold cannot be printed or created at will, which helps it retain value during periods of monetary instability or excessive money printing. These dynamics explain why gold prices surged past $3,080 per ounce.
VOLATILITY
Volatility tends to spike during periods of economic turmoil, reflecting heightened uncertainty and fear among investors.
Equity Market Volatility: The VIX index, often called the "fear gauge," has reached its highest levels since October 2020, driven by concerns over recession risks, labor market weakness, and high valuations in U.S. stocks. Volatility in equities often rises sharply as investors react to unexpected macroeconomic data or geopolitical tensions.
Bond Market Volatility: The MOVE index, which tracks volatility in the U.S. Treasury market, has also surged, reflecting uncertainty around interest rates and inflation dynamics. Notably, bond market volatility often increases heading into recessions but peaks later during the economic adjustment process.
Investor Behavior: Economic turmoil amplifies risk aversion among investors, leading to sell-offs in riskier assets like stocks and increased demand for safe-haven assets such as government bonds or gold. This shift can further fuel volatility spikes.
OUR TRADE PLAN
UVIX
We currently hold a small position in UVIX after successfully closing 90% of our portfolio. Our entry point was $29.07, and we exited progressively at $35.00, $36.00, and $41.00. Tomorrow, during market opening, we will explore new entry opportunities. Alternatively, we will evaluate other volatility ETFs that we typically utilize and may decide to make a switch.
Our trade will involve either a straddle or a strangle strategy. While the market direction is not entirely unpredictable, we will adopt a cautious approach by implementing a well-structured options strategy.
GOLD
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