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Is Chairman Powell Coming Around to Investors’ Way of Thinking?



January 10, 2019

The payroll report announced on January 4th may seem confusing to some people. The report revealed that non-farm payrolls surged and wages jumped – the largest year-over-year increase since April 2009 for the latter. Workers seem to be re-entering the work force in large numbers. Markets are taking it well – good numbers certainly fly in the face of all the recession and slowdown fears of late.  
I’m a little surprised that the market was strong following the release of this report – I would have thought that negative numbers would have calmed markets in the sense that poor numbers would have proven jittery investors correct. In other words, it would be like saying, “Look Federal Reserve – markets are getting killed because you’re not paying attention to the fact that things are bad!”  Instead, strong numbers will only serve to empower Federal Reserve Chairman Powell to stay on the war path to further rate hikes.   
So why are markets happy? Powell did make an attempt to sooth nerves by promising that the Reserve Bank is “always prepared to shift the stance of policy and to shift it significantly”.  Perhaps this was all that was needed – a recognition that Powell in fact does care about wounded investors. Alternatively, perhaps it’s just an oversold bounce. Following the market’s worst December performance in 90 years, any good news is of the ‘glass-is-half-full’ variety. In my view, while stocks could technically have some decent bounce in them, this job news merely serves to create more uncertainty over where economies are heading. China and Japan are feeling the brunt of the trade war. The poor earnings and regulatory woes from Apple, Facebook and Amazon are real. It will be interesting to see how January plays out.
For the volatility minded: The VIX is presently at 25, which is about fair considering the movement we’ve been observing in markets. Interestingly, the volatility of volatility index – the VVIX – is at two-year lows. What does that mean? Think of the VVIX as a kind of secondary barometer of fear – a below-the-surface measure. While the VIX represents fear, the VVIX represents how fearful those who trade fear are.
While that may sound confusing to some, suffice it to say that the VVIX is something pure volatility traders watch very closely. It tends to soar when the VIX is volatile itself and we like to see it drop sharply as a sign that calm is returning. The VVIX has indeed dropped significantly recently, but the VIX remains high. To me, that signifies that markets are likely getting used to VIX in the 20s. The new normal for VIX is here, and this higher-volatility regime is likely here to stay. This rally could have some legs, but volatility will remain. 
The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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