Equities have rallied 27 percent this year and that’s the cost of being bearish, though it is quite high, quipped Dean Curnutt, President and CEO of Macro Risk Advisors, when asked to comment on the distinctive feature of 2013 and the sudden market calm witnessed as of late.
To be relevant and to manage money these days, it’s hard not to be bullish, he added. The Volatility Index (VIX) chart that measures volatility on the greater 500 stocks of the S&P 500 index shows a reading of 20, indicating the situation is normal.
Asked if investors should be scared of the market calm in the US and other emerging markets such as Turkey, Indonesia and China, Dean said history shows that despite experiencing periods of market-crisis over and over again, investors tend to forget them easily.
Markets are now feeling relieved after the Fed’s forward guidance and tapering decision. With equities being the only game in town, investors have stopped watching other things. The emerging market tumult in summer was a big deal and there’s still a lot of risk there, Dean observed.
Asked if the lack of fear in the markets mean a lack of participation to begin with, Dean said market consensus tends to build on itself. When everybody starts to believe the market will go up, it does. Mutual fund inflows go up and it becomes a self-fulfilling prophecy.
Investors, hence, need to be worried about the strength of the consensus because when it’s broken, that’s where markets get caught off-guard, he noted.
There has been a lack of volatility in the commodities market, except gold. Asked if that signifies something, Dean said may be it was a fad. Money is flowing out of gold with the onset of Fed taper while commodities have been very stable overall, he said.
Asked if he’s worried about 2014, Dean said he’s concerned about the performance of emerging markets and the underperformance risk of US markets. Everyone in the market is, in someway, indexed to the S&P 500 (SPX).
There’s five-and-a-half trillion dollars explicitly indexed to the SPX and 27 percent is a tough benchmark to beat. 2014 could get off to a solid start because people’s fear of underperformance could be quiet high, he concluded.
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