- Investors turn bearish on stocks despite robust earnings season as the outlook looks bleak against a slew of macro factors.
- Volatility likely to increase because the future is narrative-driven and there are conflicting narratives between tightening monetary policy and signs that the U.S. economy remains resilient.
A well-known Bible parable oft quoted by investment bankers tells the story of a master with three servants, who goes away to a distant land and leaves some money to them to steward.
In his absence, one of those servants buries the money in the ground, while the other two use it to make more money and the one who had buried the money in the ground, returning the same, was punished for his laziness.
Whether its stocks, bonds or cryptocurrencies, the whole point of investing is in the prospect that that which is being invested in, appreciates in value.
And buying stocks is one of the most common starts in the investment world – in expectations that a booming economy will provide better for companies which will throw off dividends or attract new investors as the stock prices rise.
Which is why investors who bought the dip in stocks while the pandemic was gutting the global economy were ridiculed for catching falling knives.
But now, despite robust earnings and little in current forecasts to suggest a recession, investors are retreating from stocks at a pace akin to the early days of the pandemic.
Inflation has been cited as one concern, but historically, stocks have weathered inflation better than any other asset class, even gold.
More likely though, a significantly large number of investors are skittish that the rally in stocks was fueled by nothing more than central bank largesse and concerned that once that artificial support is removed, things like price-to-earnings ratios will once again become relevant.
Which is why an otherwise solid earnings season has proved to be a drag on the S&P 500 which marked its fourth straight week of declines despite solid earnings.
The Cboe Volatility Index, otherwise known as the VIX is back above 30, near its highest level since 2020, when the pandemic had gummed up the economy.
Investors are leaving stocks in droves – liquidity is leaving the markets and forward discounting that, and the U.S. Federal Reserve hasn’t even really begun to tighten conditions.
And ultimately, stocks are a forward-looking investment, which means that despite how good things have been, investors are more worried about how things are going to be, which is why markets are so volatile at the moment – the future is narrative driven, no one knows for sure.
