Higher volatility reflects worries over trade deals, the shutdown, and banking credit jitters
"Short-term volatility is greatest at turning points and diminishes as a trend becomes established," wrote George Soros in his book The Alchemy of Finance. Last week, I warned investors to expect volatility. We have had that in spades.
Verbal threats from both sides before the upcoming China-U.S. trade negotiations led to stocks whipsawing in both directions for most of the week. The continued government shutdown didn't help matters either, but it was two small regional banks that spooked investors most.
Concerns about credit among two regional banks, Zions Bancorp and Western Alliance, triggered an overnight sell-off on Thursday into Friday. Both companies were victims of fraud in the distressed commercial real estate market. This sparked concerns that other banks may also be victims.
In the meantime, China and the U.S. traded accusations, but don't get carried away by threats and counter-threats. It is reminiscent of Trump's first term and is all part of the positioning game ahead of the meeting between Presidents Xi and Trump at the APEC meeting in two weeks. I won't bother to regurgitate a list of the he said, they-said jawboning that had freaked-out traders booking appointments with their therapists.
Suffice it to say, most of the acrimony centered on China's near-monopoly position on strategic metals used in everything from fighter jets to cell phones. As an example, just this week, the Defense Department canceled a tender offer to purchase $500 million worth of cobalt over a five-year period. There were no bidders.
It was the first attempt to acquire this strategic metal since 1990. Cobalt is used in rechargeable batteries, magnets, and military systems. Beijing dominates cobalt processing and has built a significant stockpile. In comparison, threatening to limit our exports of cooking oil to China seems ineffective. In any case, I expect more of the same as we approach the meeting of the minds at the end of October.
The government shutdown, now the third longest in history, is dragging on with both sides digging in their heels and refusing to talk, let alone compromise. This week, we missed the most recent unemployment claims data, the Producer Price Index, and several other key macroeconomic data points. That leaves day traders in charge, with headlines providing the primary trigger for buying and selling.
Headlines like "Thousands of Treasury, HHS employees fired" got the juices flowing on the downside. "Court blocks Trump administration's latest mass layoffs" was also good for a few points on the upside.
Yes, the administration has taken advantage of the federal furloughs. The Office of Management and Budget has fired thousands of government employees. They have also transferred billions in federal funds away from what Donald Trump termed "Democrat programs" and infrastructure projects in blue states.
I had hoped the shutdown would have been over by now, given the need to ensure paychecks for the military, but Trump found funds to cover that October 15th deadline. The President's recent moves have bypassed Congress, raising questions about who holds the 'power of the purse' in government.
How much of these actions will survive the jurisdiction of the courts is questionable. A federal judge in San Francisco has already placed a hold on the government's firings, and many of these unilateral actions are likely to be overturned. However, the attempt to do so makes good copy for the President's base and may repair his failed attempt at cutting government headcount through the use of DOGE.
Given the sage advice of Mr. Soros, it has become abundantly clear to me that volatility is increasing at an exponential rate. From a low of 15, risk, as measured by the volatility Index (VIX), has jumped to 23.37 in less than a month. That is a 48% increase.
During that time, safe-haven assets like gold gained more than 16%, while the yield on the 10-year U.S. Treasury bond fell below 4%. On the other hand, Bitcoin, a leading risk asset, fell 8.8%. During the same period, the S&P 500 Index appears unable to surpass the 6,750 level. As the month progresses, the risk of a further pullback in the equity averages seems highly probable.
Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401, email him at billiams1948@gmail.com, or visit his website at www.schmicksretiredinvestor.com. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.