One Rate Hike Down, What Lies Ahead?

“And you all know, security is mortals’ chiefest enemy.” – Hecate in Macbeth

One rate hike down, but what lies in store for markets in 2017? According to a recent Natixis survey, as reported by ThinkAdvisor, many institutional investors seem to be increasingly concerned about not only the pace of rate hikes, but also geopolitical issues, and the lack of specifics regarding the yet-to-come domestic policy changes more generally. But at the present, chasing the market higher and hopefully booking solid gains into year-end seems to be the myopic focus, evinced by headlines such as “With S&P 500 Near Record, Hedging is an Afterthought for Traders” and  “By One Measure, Traders Are the Most Bullish on Stocks Since at Least 1997“.

Both the level of volatility, and the volatility of volatility, as measured by the 20-day standard deviation of changes in the VIX, are near the lows for the year. Further, we’ve just witnessed the first month of outflows from Managed Futures mutual funds in a couple of years. The category, largely made up of trend followers, is often counted on to provide “crisis alpha”, so net redemptions would seem to suggest that “crisis” isn’t a word on anyone’s mind. While we too are constructive on the current market, we can’t help but think that when hope inevitably gives way to the inconvenient realities associated with trying to effect change, that investors may wish they’d gone a bit lighter on the optimism, instead adhering to Buffett’s mantra of being fearful when others are greedy.