Fear Seems To Be Lacking In This Bear Market

After such a long, drawn out bull market it makes sense for investors/traders to be conditioned on buying the dip.  After all, when have they ever needed to fear a big drop?  They have happened of course, and the Fed has always come to the rescue.  Even if they do nothing it is the perception that becomes the reality:  the Fed will always have your back.

But as we have come to learn over the past few months that is far from the truth.  The Fed is 'alledgedly' on a campaign to stomp out high inflation.  If there is anything that is more poisonous to risk assets than rate hikes, I want to know about it.  Rate hikes are meant to cool down the economy and runaway inflation if that is indeed the case, as it certainly is today.

There is a strange lack of fear in the markets however, and that has me quite puzzled.  No doubt the shock from a massive drubbing these past few months have numbed most investors.  Four of the first five months of the year have shown negative returns, and with the Fed only having raised rates twice so far, there is little doubt more hikes are coming.  

The futures market in fact is pricing in monster rate hikes over the next few months.  We could see the funds rate significantly higher than where it stands today (.75).  This market sees the funds rate at 2.5% by the September meeting conclusion.  

So, even as the market seems to be pricing in the hikes, they are not pricing the impact to the economy, which will inevitably take a hit.  But volatility in the markets is low, as if nobody really minds the higher rates, or even cares.  At some point that'll change, will it be too late?  Today, with volatility relatively cheap and protection equally inexpensive, it's best to cover your tracks with some index puts and plenty of cash, for when the fear rises sharply (as it did for a time Friday), you'll want that protection.

 

Posted In: contributorsOpinionMarkets

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