Macro and Flows Update: August 2024 -e31

Summary

In this macroeconomic video, the host discusses the S&P 500's significant decline and subsequent recovery in August, attributing the swift rebound to ample gamma and early deleveraging. They predict a reduced likelihood of a massive tail risk and suggest an early rally leading to an end-of-year market surge. The analysis also covers the impact of upcoming events, including the Fed's Jackson Hole meeting and the U.S. election, on market volatility and the potential for geopolitical stress points. The video concludes with investment strategies focusing on long-dated calls amid rising volatility and the outlook for interest rates and gold.

Takeaways

• 📉 The S&P 500 experienced a significant decline to 5120 in futures, followed by a swift recovery, which was surprising in its extent and speed.
• 🚀 The rapid deleveraging and well-supplied gamma in August helped to mitigate the decline's impact, making it less severe than if it had occurred in September.
• 🔍 Despite the decline, tail risk has diminished as the market has adjusted, and the likelihood of a massive tail has decreased, making another significant decline unlikely.
• 📈 The decrease in V Leverage and the positive flows expected in the September Opex suggest a potential early rally and an early kickoff to an end-of-year rally.
• 💹 The speaker believes that the market has started to rally and advises to continue buying dips, playing from the long side into the end of the year.
• 📊 There is a mention of a potential hurdle at the 1.5 standard deviation up of the 20-day, which is a crucial level for the market to surpass to project strength.
• 🌐 The Fed discussion and Nvidia's event in late August are highlighted as important catalysts that could add momentum to the market rally.
• 📈 The speaker anticipates higher volatility in the market, which will likely lead to bigger rallies and pullbacks, but not undo the overall rally.
• 🗓️ The election and related political rhetoric are expected to increase volatility towards the end of the year, with events like the September 10th debate being key to watch.
• 🌍 Geopolitical risks, particularly from China, are highlighted as a potential gray swan event that could cause significant market declines if certain triggers occur.
• 📊 The speaker suggests that long-dated calls should be bought as a trade, given the current market conditions and the expected increase in volatility.

Q & A

What significant event occurred in the S&P 500 futures in August?

There was an incredible decline down to 5120 in the S&P 500 futures, followed by a quick recovery that was surprising in its extent and speed.

Why was the recovery from the decline in the S&P 500 futures so quick and significant?

The recovery was quick due to the deleveraging that happened quickly, with gamma being well supplied in August, which helped to stem the decline and make it a stairstep multi-day process.

What is the implication of the early decline in August for the expected severity of the decline?

If the decline had happened in September as initially expected, it would likely have been more violent and had more serious effects. However, because it started in August with well-supplied gamma, the damage was less severe and shorter than expected.

What does the speaker believe about the likelihood of a massive tail risk in the market?

The speaker believes that the likelihood of a massive tail risk is diminished, as the decline has already occurred and the market has shown resilience with less tail risk than previously expected.

What is the speaker's outlook for the market's performance towards the end of the year?

The speaker expects an early rally in the market, potentially leading to an end-of-year rally, with the market reaching 5900 to 6050 by December, despite the possibility of some pullbacks along the way.

What factors are contributing to the speaker's expectation of higher volatility in the market?

Factors contributing to higher volatility include the initial decline releasing pent-up volatility, upcoming events such as the Fed discussion at Jackson Hole and Nvidia's earnings report, and the election's impact on market sentiment.

What is the speaker's view on the role of geopolitical events in market volatility?

The speaker believes there is an increasing risk of geopolitical stress points, such as actions by China, which could cause significant volatility and potentially lead to a tail risk of greater than 20% in the market.

What trading strategy does the speaker recommend for investors given the current market conditions?

The speaker recommends buying long-dated calls as a strategy, as they believe volatility is too cheap given the recent decline and that this will allow for more significant market swings going forward.

What is the speaker's perspective on the role of interest rates in the market's future direction?

The speaker believes that growth will surprise to the upside, with interest rates potentially rising as high as 5% by the end of the year, which would support a rally in the market.

How does the speaker view the potential impact of the upcoming election on the market?

The speaker suggests that the election, with its increased contestation, could lead to significant volatility, especially if geopolitical tensions rise, but also notes that it could be an optimal time for certain geopolitical moves.