22 February 2018: Entering choppier waters
– Relative calm. The worst of the volatility is likely past for now, extreme investor positioning has reset, and the VIX is close to long-run averages.
– The economic backdrop remains broadly unchanged and positive. Growth is strong and corporate earnings growth is good. We do not believe that the recent sell-off presages a more prolonged decline in equity markets.
– Hopes for higher growth may now have to compete with fears of higher inflation and interest rates. Abnormal calm is unlikely to return, and correlations between bonds and equities are likely to be less stable in this new phase.
– We still see opportunities in today’s market and add a number of tactical asset allocation positions, but we are also preparing for the new environment by buying a put option.