One look at the recent collapse in the VIX, which has tumbled to levels seen just before the S&P hit its all time high in Sept, and investors may be left with the impression that there is nothing but smooth sailing ahead.
And, at least for the universe of vol-targeting systematic funds, many of which buy only if the VIX drops below a certain threshold, that’s precisely the case as the slump in the VIX is all they needed to rush back into the stock market.
However, according to Mark Kiesel, Pimco’s chief investment officer of global credit, now is precisely the time to get out of Dodge as the increasing U.S. deficit, stress in U.S.-China relations and a deceleration of global growth are among signs that “markets are set for more volatility ahead,” and that “now is the time to de-risk portfolios, particularly out of U.S. equities and into higher quality bonds.”
Speaking in a Bloomberg TV interview on Thursday, Kiesel said that “the market has priced in a lot of good news right now” and with all major asset classes overbought, the Pimco CIO “would be tilting the portfolio towards high quality Treasuries, agencies, investment-grade corporate bonds, owning less high-yield and owning less levered companies. This has been a situation where the rising tide has lifted all boats.“
The current bullish market drivers are technicals and lack of issuance, while fundamentals are “clearly slowing in terms of growth.”
“The big picture here is that we’re running increasing deficits,” Kiesel said. “That sugar rush is going to come off, you’re going to see these earnings estimates have to come down as the global economy decelerates.”
Kiesel also suggested that central banks “are going to be withdrawing from markets over time and the ability to stimulate going forward is not going to be there in terms of fiscal policy. That’s what’s going to be troubling for the markets going forward.”
Perhaps, although with most central banks having turned dovish in recent weeks, we fail to see just how they are “withdrawing” from markets; in fact the simplest reason why stocks have surged in 2019 is precisely because the Fed and other central banks have told investors that it is again safe to buy (apparently everything).
Finally, Kiesel said that optimism around a resolution to the U.S.-China trade war has also been driving the market but “the problem is that this relationship with the U.S. and China is not going to fundamentally change, there’s going to be continued friction on intellectual property going forward.”
As for Pimco’s house call, despite its bearish bent, Pimco doesn’t expect a recession this year, calls for 2% growth in the U.S. economy and contained inflation. “With inflation contained the Fed can take the foot of the brake,” Kiesel said.
Curiously, not even Pimco is taking its CIO’s advice fully, and the world’s largest bond fund currently has long positions in midstream energy, global consumer, real estate, global banks according to the interview.