Risk happens slowly, then all at once, the saying goes.

And that risk goes hand-in-hand with volatility.

We’re seeing that play out in real time lately as investors, including wrong-footed hedge funds, increasingly capitulate to the gravity occurring on the major stock indices.

We’re witnessing severe volatility happen at the same time in stocks, oil, gold, nickel, wheat and other asset classes and commodities.

Such is the turbulent nature of financial markets as investor complacency – an all-time high for the Nasdaq Composite in November, for example –  turns into a bear market in March.

What’s happening in the stock market had been simmering for a while with bubble after bubble popping before many investors finally turned their attention to their beloved big cap tech stocks that had treated them so well.

Even the strongest of the strong – Apple – is down nearly 10 per cent from its peak.

If you’re a do-it-yourself investor or have someone managing your portfolio, were you positioned for this market?

You’re probably not sweating too much if you’re a long-term investor and willing to ride out volatility and downturns.

But if you don’t like seeing red on your screen and your hard-earned capital eroded day after day, you might not be thrilled.

Make no mistake. This isn’t just about Russia and Ukraine.

It’s comforting to believe that if not for the war, everything would have been fine.

That the economy would have continued to re-open, and the consumer would have remained strong along with corporate profits.

Maybe. We’ll never know.

But the fact is that economic growth was already decelerating from extreme monetary and fiscally-fuelled levels in 2021, and it’s going to be virtually impossible for U.S. GDP this quarter and next to come anywhere close to repeating the 6.3 per cent and 6.7 per cent numbers from Q1 and Q2 from last year.

And inflation, pre-war, as represented by two of the bigger inputs in U.S. consumer price data – new and used auto prices and rent – was also rolling over from lofty levels in 2021.

In a slowing growth and slowing inflation environment the main places to protect your money are U.S. dollars, U.S. Treasuries, and gold, according to back-tested data from Hedgeye Risk Management.

Three ways to get exposure to those assets are through ETFs – UUP for dollars, TLT for long-term U.S. bonds, and GLD for bullion.

As mentioned in a previous email to subscribers, I was fortunate enough in my personal (fun money) account to buy those ETFs in time, along with a gold miners ETF, and an energy stock ETF (which I chased).

I’ve been been trimming some profits along the way.

I still have some battered consumer discretionary and technology stocks languishing in my portfolio but they only make up about 10 per cent of the total.

It’s a good feeling when the major U.S. indices are awash in red and down by two and three per cent on a given day, to see mostly green on my screen.

Admittedly, inflation is sticking around higher for longer than expected thanks to the disruptions created by the war and that has led to volatility happening all at once.

Let’s focus on oil, gold, and tech stocks.

Oil volatility is an estimate of the expected 30-day volatility of crude oil priced by the United States Oil Fund (USO). It’s spiked dramatically due to the war creating uncertainty about supply and the U.S., and eventually the U.K., banning Russian imports of oil, natural gas and coal.

Almost predictably, investors and speculators sent West Texas Intermediate oil surging on Tuesday to nearly $130 a barrel on reports U.S. President Biden was going to announce the ban in a 10:45 am ET news conference, and then sold off when the news was confirmed.

Gold volatility has also been extreme as the yellow metal proves its worth by nearing all-time highs during a world-shaking geopolitical event.

Gold volatility is measured by the CBOE Gold ETF Volatility Index (GVZ), an estimate of the expected 30-day volatility of returns on the SPDR Gold Shares ETF (GLD).

Nasdaq volatility had been steadily rising since the start of the year with more and more investors positioning for a downturn in technology stocks.

Nasdaq-100 Volatility Index measures 30-day implied volatility as expressed by the prices of certain listed options on the Nasdaq-100 Index.

We’ll leave the final word to the late mathematician, Benoit Mandelbrot, author of The Misbehaviour of Markets, (a “bible of sorts” for Hedgeye founder and CEO Keith McCullough), whose work demonstrated “volatility clustering”:

Markets are turbulent, deceptive, prone to bubbles, and infested by false trends. It may well be that you cannot forecast prices. But evaluating risk is another matter entirely.”


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