Macro and Flows Update: April 2024 - e28

Summary

The video discusses the recent market decline, which is the first significant downturn since October 31st. Despite a 15% rally due to Federal Reserve stimulus, the S&P has dropped 6% from 5350 to 5050 in a week. The speaker suggests that this is a buying opportunity in a stagflationary environment where the Fed is expected to remain accommodative. They predict a potential market rally to 5700 or higher by the end of the year or early next year, but caution that the current decline could extend further, especially if there's no reversal by May. The speaker advises investors to be flexible, avoid aggressive long positions for now, and watch for a potential turnaround around the May 1st Fed meeting. They also highlight the importance of considering both the potential for further decline and the opportunity for a significant buying moment if the market reaches 4800 or lower.

Takeaways

• 📉 The S&P has experienced a 6% decline from 5350 to 5050 in a week, marking the first significant downturn since October 31st.
• 💹 The 15% rally from the bottom to the recent peak was largely due to stimulus measures and Federal Reserve policies prioritizing growth over inflation.
• 🚀 Despite inflation concerns, the Federal Reserve is expected to remain accommodative, which could lead to a stimulative environment going into an election year.
• 📈 The current market pullback is viewed as an opportunity to buy, as the market is not expected to move in a straight line and volatility is anticipated.
• 📊 Volatility has spiked and then muted, indicating a deleveraging event. This is typical before options expiration and can lead to a supportive window on Fridays.
• 🔍 The market's performance is influenced by the interplay between stimulus, economic growth, and the Federal Reserve's stance on inflation and growth.
• 📌 The speaker suggests that buying long-dated calls and shorting stocks could be a desirable strategy in the current environment due to expected market volatility.
• ⏳ The period around May 1st, particularly before the Federal Reserve meeting, is highlighted as a potential time for a market turnaround.
• 📍 Key levels to watch are 4800 and potentially lower to 4600 if the decline extends, which could present significant buying opportunities.
• ⏳ If the market does not show strength by May 15th, the decline could extend further, possibly leading to a more substantial downturn ahead of the June options expiration.
• 📈 The speaker anticipates a final significant market push to levels around 5700 or higher by the end of the year or early next year before the market faces headwinds.

Q & A

What is the significance of the market decline mentioned in the script?

The market decline mentioned in the script is significant as it represents the first major drop in the market since October 31st, marking a 5-month long upward trend with almost a 15% increase from the bottom. The recent decline took the S&P from 5350 down to 5050, a 6% drop in about a week, which is substantial in a short period of time.

How has the market decline affected hedge funds and certain investment portfolios?

The market decline has been painful for those in hedge fund land, particularly in relative value and long Delta long beta portfolios. These types of portfolios have been negatively impacted due to the sharp decrease in market value and the associated risks that come with such a rapid decline.

What role did the Federal Reserve's stimulus and commentary play in the market rally prior to the decline?

The Federal Reserve's stimulus and commentary played a crucial role in the market rally prior to the decline. The Fed's indication that it would prioritize growth over inflation led to a positive trend, with people becoming increasingly invested due to the belief that the Fed would continue to be accommodative in an environment of stimulus.

What is the current stance of the Federal Reserve regarding inflation?

Despite the rise in inflation, the Federal Reserve is expected to remain accommodative. This is based on the belief that the Fed, along with an increasingly stimulative Treasury and government, especially in an election year, will prioritize economic growth over inflation concerns.

What investment strategy is suggested for dealing with market volatility?

The script suggests focusing on owning long-dated calls and short stock as a desirable investment strategy during market volatility. This strategy allows for taking advantage of both upside and downside movements in the market, providing opportunities for profit regardless of market direction.

What historical market behavior is the script referring to when discussing the late 90s?

The script refers to the market behavior of the late 90s, particularly the years 1997 to 2000, as a period of increasing market volatility to the upside. During this time, markets experienced significant rallies and final blow-off tops, where valuations could reach extremely high levels due to stimulus and short positioning in an expensive market.

What are the potential implications of a 10% market pullback?

A 10% market pullback could lead to significant policy responses, with the government and Federal Reserve likely to focus on stimulus measures. This could result in more asset inflation and economic growth, potentially allowing the Federal Reserve to remain accommodative and providing opportunities for investors looking to buy in during periods of market weakness.

What is the expected market environment in the coming weeks according to the script?

The script anticipates a challenging market environment in the coming weeks, with the potential for continued pain due to deleveraging, higher interest rates, and geopolitical tensions such as the Israeli-Iranian confrontation. This could lead to a period of poor market flows and increased volatility.

What are the key dates to watch for potential market turnaround?

The key dates to watch for a potential market turnaround, as mentioned in the script, are around May 1st, coinciding with the Fed meeting, and potentially extending to May 15th or even the June Opex, depending on market conditions and the extent of the decline.

What is the long-term outlook for the market according to the script?

The long-term outlook, as per the script, suggests that despite the expected rally and potential final headwinds by the end of the year or early next year, there could be one last significant push up to 5700 or even 5800-5950. However, this would be followed by a dramatic rally and then a pullback, presenting a significant buying opportunity.

What advice is given to investors regarding their approach to the market during this period?

The advice given to investors is to be water, meaning to be flexible and not aggressive into longs yet. They should look for opportunities around the May 1st Fed meeting and be watchful for continued momentum and strength. Once the rally shows momentum, it might be time to get into long call short stock positions with extra long Delta.