Volatility Bends the Rules
Macro Outlook
The Economy
Worried Investors Fear of Missing Out
A war in the Middle East, the war in Ukraine, and a tight U.S. election are pushing volatility higher. Typically, as shown in the chart below, higher volatility leads to lower prices and poor stock market performance. However, as we can see in the shaded green portion of the graph, the recent increase in volatility has been accompanied by all-time highs in equity indices.
Since the lows of March 2009, when the S&P 500 traded at 666, the market has increased by a factor of 8. Performance has been so strong over the last 15 years that, while investors may be worried, they do not want to miss out.
The fixed income market generally behaves in the same manner: higher volatility leads to lower prices. As we can see in the graphic below, 2008 and 2020 were exceptions, as those were very unusual periods. The factors currently worrying equity investors are not affecting bond investors in the same way. The prospect of central bank easing is countering the risk of higher prices from war or tariffs.
The Opportunities
Long Sustainable Small Cap
Megacap equities like Microsoft and Nvidia have been dominating equity markets for a while. They have delivered exceptional results and carry high profit multiples because of their strong growth in the past. However, as they grow larger, there is a limit to their growth rate, especially as officials begin to discuss their monopolistic behavior. On the other hand, small sustainable companies should benefit from growing demand for electricity and sustainability.
Long Sustainable Silver
Silver has become greatly used in industrial processes due to its conductivity and antibacterial properties. Industrial use now represent more than 50% of silver demand and it should grow to more than 60% by 2030. Solar panels accounted for 12% of demand in 2022, and this is projected to rise to approximately 20% by 2030. The supply and demand outlook for silver is very promising.
Short Oil Producers
Oil prices have recovered some of their losses earlier in the year. The escalation of the war in the Middle East is providing the fuel behind the latest rally. We expect the situation to continue deteriorating in the near term, but this pop should provide an opportunity to short oil producers in the coming weeks.