Morning Note: The Essential Challenge of Risk Management

If you’re the type who cares to follow day-to-day market gyrations.. well, like I said last Tuesday

“One thing’s for certain, it’s going to be one volatile summer for asset markets!”

While heavyweight earnings releases (Apple, Google and Microsoft today) can certainly move the equity market, a Fed policy meeting announcement (tomorrow) can move everything. 

As we’ve been preaching for months now, getting the inflation narrative right will be key to investment success in the years to come.

Should the Fed bow to the pressure to confess that perhaps there’s more than simply a “transitory” spike here, and, heaven forbid, actually suggest that a prescription is forthcoming, look for markets to respond in, let’s say, less than welcoming fashion. I.e., very little chance that they’ll take that risk… but still…

Here’s from my latest musings in our internal market log:

“With regard to the Fed, they’re catching the same heat. Should J. Powell even hint at tightening policy to any meaningful degree, markets will get hammered across the board. As for which asset classes will do better or worse, it depends on whether or not the market believes that the first round of tightening will thrust the economy back into recession.”

Here’s from Sherwin Williams’ earnings press release this morning (H/T Peter Boockvar):

emphasis mine…

“While demand remains robust across nearly all of our end markets, industry raw material inflation is more significant and sustained than originally anticipated. We continue to have great confidence we will offset these higher costs with the incremental price increases we have announced, and we are prepared to implement additional increases should they become necessary.


Asian markets (with Chinese equities continuing their descent) took a beating overnight: all but 4 of the 16 markets we track closed lower.

Europe’s down nearly across the board as well this morning, with 15 of the 19 bourses we follow in the red as I type.

Same for U.S. stocks: Dow down 161 points (0.46%), SP500 down 0.41%, SP500 Equal Weight down 0.48%, Nasdaq 100 down 0.54%, Nasdaq Comp down 0.67%, Russell 2000 down 1.52%.

The VIX (SP500 implied volatility) is up 6.77%. VXN (Nasdaq 100 i.v.) is up 5.99%.

Oil futures are down 0.07%, gold’s up 0.22%, silver’s down 0.51%, copper futures are down 0.20% and the ag complex is up 0.05%.

The 10-year treasury is up (yield down) and the dollar is down 0.10%.

Led by gold, Verizon, consumer staples, ag commodities and uranium miners — but dragged by solar stocks, emerging market equities, energy stocks, ALB (lithium miner) and metals miners — our core portfolio is off 0.54% to start the session.

Hari Krishnan, in his insightful and instructive book The Second Leg Down touches on the essence (or, perhaps, the essential challenge) of risk management:

“…it is best to assume that predicting financial crises is like predicting earthquakes. We can identify situations (geological fault lines) which are unstable, but can’t with certainty say when an event will occur.”

Have a great day!

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