In spite of all of the commentary about inflation fears and rising rate concerns being the cause for the most recent bout of market volatility, the major indices jumped more than 1% yesterday after a stronger than expected inflation report. Of course, all of this could have simply been a case of buying the rumor and selling the news or in this case selling the rumor and buying the news. Who knows? Nobody knows.
Last Saturday, the WSJ had an interesting piece about short volatility covering and how that may have contributed to recent market volatility, which intuitively makes sense given the declines were appeared to be indiscriminate of sector, including the more traditional defensive sectors. If short volatility covering was the culprit, are we in the clear now?
I don’t know the answer to that question. However, what I do know is that rates continue to move higher. Our federal government deficit is moving higher. Interest rates are likely to continue to rise as a result of increasing government debt levels. Market volatility probably isn’t going away since rate volatility tends to lead to equity volatility.
So, the stock market is likely to be much more volatile going forward than it has been and longer-duration bonds, and their proxies, are going to be a tough trade.
One final point…the uptrend in the market is still in place in spite of all of the hullabaloo.