As I've expressed of late, there's some cause to be bullish -- for the first half of this year in particular... But, then again, as I've also stressed, hedging is more than warranted right here as well -- particularly, since, per the following, investors are largely not doing so.
Bloomberg's Ed Harrison is, as usual, making sense this morning:“Muted market moves in reaction to news of an investigation into the Federal Reserve shows how uncertainty is more difficult for investors to hedge, which increases the chances of sudden tremors in financial markets.
Before the US equity market opened, my colleague Sebastian Boyd noted the subdued reaction in Treasuries to news that the Fed had been served subpoenas by the Department of Justice. Stocks are equally measured now that they’ve started trading, and they might even end in the green on the day."
"President Trump’s unpredictable policy moves that traders are dealing with aren’t necessarily quantifiable via a range of market outcomes. It is uncertainty in the Knightian sense -- not measurable and not reliably possible, or even useful, to estimate. It’s difficult to hedge, so investors have largely stopped doing so.
The risk is that when uncertainty is transformed into downside certainty, market participants will be forced to react in concert and all at once. It’s reminiscent of the ‘nickels-in-front-of-steamroller’ approach that Long-Term Capital Management took a quarter-century ago by immensely leveraging small bets based on their risk models. What they learned when Russia defaulted on its foreign currency government obligations is that market reactions go quickly from Pangloss to panic when downside certainty interrupts.”
--Edward Harrison
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