Equity markets have been much less bearish of late, but that doesn’t mean that more volatility is off the table, Real Money’s Stephen “Sarge” Guilfoyle argues.
“Until we know more, the very real possibility exists that in exchange for a softer landing now, we have traded for an elongated period of volatility,” Guilfoyle wrote in a recent Real Money Pro column.
The temporary resolution of the debt ceiling impasse earlier this month was positive for stocks, as was support from President Biden for Fed Chairman Jerome Powell’s latest comments.
However, an extension does not solve the problem of a potential default and could easily mean that “heightened risk[s] to the underlying economy and by extension the financial markets are now elongated,” Guilfoyle wrote. “Capital would normally move back into equities by November for a push into year's end. How much this threatens the curve of that typical behavior, I can not be sure of at this time.”
In addition, current economic indicators such as supply chain bottlenecks and lower growth could cause more pain and additional periods of correction.
Guilfoyle suggests people should change their strategy if necessary and “trade the market more than to invest in it, as there will be volatility during a time of year when at least those managers that have had good years are trying to wind down their activity for the year without screwing up their performance, and thus, their compensation,” he wrote.
He estimates that volatility could rise in late November or early December when liquidity shrinks.