With almost boring certainty, markets are approaching the upcoming FOMC meeting, where everyone expects another 25 bps cut. Nobody is expecting any big surprises. Record-low implied volatilities across asset markets evidence this. Below is the chart of Emerging Markets FX implied volatility, which is approaching the 20-year low.
Equities are ramping on a hopeful resolution of US-China talks. Let’s face it. Who really believes in a lasting deal? I don’t. The lines are drawn, the stakes are high, and these two heavyweights might just be trying to buy time before more tension resurfaces. It’s inevitable. Until then, what can go wrong?
It’s interesting how equities seem to track higher, but this is not necessarily fueled by hopes of a broader market sentiment or reignited growth. Cyclicals versus Defensives, for example, are far from the highs, which were printed in April 2024.
Similarly, the breadth is not impressive in this run-up, with the percentage of stocks in the SPX above their respective 200-day moving averages stagnant at around 65% (blue line), which is lower than at any point during 2024. There are a few winners, and we all know who they are.
The Paper Alfa 2025 portfolio, meanwhile, is printing another high (not including today’s performance) and is up 22.4% YTD. I am already thinking about next year's portfolio, which is going to be more defensive. I think 2026 will see significant market gyrations as I map out probabilities. This year so far has seen pretty much every asset perform, which is rare. 2017 was such a year, while 2018 flipped the script as volatility soared.
Following are my market thoughts and my FOMC preview. As a reminder, I am running a 20% discount for life on a new subscription in November. Use the link below to subscribe.