Ever since president Trump got on the throne, market has never been better. Bobbing heads on CNBC couldn’t stop talking about the volatility being at its historic low. I confess I had also playfully scooped up some calls on VIX a few days ago but was largely taking pleasure (pronounce as ‘pain’) to watch its value fades.
So where has the volatility been to? Here’s a list of my attempt to rationalize why we are seeing what we see.
1. People ran out of things to buy.
Everything is at their historic high, stock, bond, real estate, even bitcoins! Legendary investors including George Soros, Bill Gross, Ray Dalio argued the valuation of the market has gone out of touch – everything is too expensive. They were right in their assessment, but only Soros had the gut to go against the current, and has a fraction of his wealth distributed to the other market participants (Thank you uncle George!).
So think of it, if investors are going to liquidate their stock holdings right now, what else can they buy? Bond is returning a meagre 2-3%, treasury at almost 0, cash at less than 1%. Real estate and bitcoin already at their peak, if the investors have already own some of them it’s unlikely they find reinvesting in those assets attractive. So he’d rather tell himself to stay put, “don’t fidget, leave the money where it is and watch”. So that’s why we see what we see.
2. People don’t want to trigger tax.
An intelligent investor carries a diversified portfolio. Every year there are some performers and some laggards in the portfolio. The investor could balance around, or pair sell the gained and lost position together to avoid tax triggers.
But now, it can be difficult. (Perhaps the best difficulty one can dream of). Everything in his portfolio may have climbed up tremendously. In the past 10 years, stock market climbed up 3 folds. The popularizing of the ETF and avoidance of individual stock selection has ever moved the stocks in unison. It is difficult for investors to find a losing position (don’t you just love this?). So they may just want to hold on to the positions and let the unrealized gain accumulates. Thereby leaving the market undisrupted.
3. People ran out of places to put their money.
Let’s face it. America doesn’t need to be great again, it’s already great! In the past 10 years, it is the only massive part of the world that worth investing into. Europe was in recession, Japan had deflation, China has debt problems.. The US? Too much cash, stock buy back, zero interest rate. It was the fairyland for investors, throw money on to the floor and money grows on the trees.
Even today, the potential fertile ground to throw money around is limited. The biggest comparable continents of United States, namely, China, Russia, Europe and South America, none of a single place holds a promising future than in the United States. China alone is experiencing tremendous capital flight up to 1.5 trillion dollar in the past few years and a majority of that amount comes into the America. Trust me, given the tightening control of capital flight from China, these money are not going back. And there you go, the nice non-volatile die-hard pillar support of the Chinese money.
4. People ran out of things to fear.
Ooh, this one is scary. But you can name a million incidence under this point. Right after the 2007, people were fearing double dip in recession. That didn’t happen. Then people were fearing Fed’s over-involvement, but hyper-inflation didn’t happen. Then people were fearing Greece and European recessions, and they didn’t affect us much. Then people were fearing China economic slowdown, and it didn’t itch us. Then people were fearing Russian geopolitical ambition, the terrorism activities, and etc etc. Now, all these have proven there is nothing much to fear. And this the scary part. Nothing to fear should be fear itself. Given the added optimism of Trump’s presidency, this further reduced the possibility of a volatile market.
So what can change all these?
People ran out of things to buy are still going to be running out of things to buy in the next few years as interest rate creeps up. People run out of places to put money at are not going to take their money away from the United States. Potentially nothing is going to change any of it and this is where bubble begins to form. The level of the market is just going to go to a point where no one has anymore money to pile on it and it will start to crumble.
The only caveat is the optimism surrounding Trump’s presidency. President Trump promised to spend, cut tax, all of them sounds great. However, if any of these after all were only cosmetic efforts, or if the policies were implemented haphazardly, all of these can change.
So, what are your takes on equity market today? Feel free to leave a comment below.