Impact Blog

Hello 2020

February 4, 2020

Of course elections are at the tops of many people’s minds, and most of them likely know there has been very little correlation historically, between  Presidential outcomes and market returns.

 

That said, real wages are up among lower paid workers who tend to spend a greater percentage of their increased earnings. And though spending is on the rise at a healthy pace, so is saving. Inflation remains in check even as money remains cheap and available, unemployment is historically low and inflation-adjusted income is up. Many corporations are sitting on significant cash and lower tax rates will continue to have a positive effect on net earnings which, while it may not trickle down to everyone, does benefit investors.

 

Currently the market outlook is strong domestically, albeit we’re not out of the woods yet with China’s trade deal, the implementation of Brexit, and any number of possible domestic calamities, political or otherwise. Not to mention, stocks are not cheap right now, which can make buying in a difficult wager at this point. Many of our clients wanting to put cash to work have opted to dollar-cost-average in hopes of buying more cheaply during a correction.

 

An Options Probability Assessment

 

Outside of stocks and bonds, there is another market for time-based investments called the Options Market.

 

Brad Gilbert, our Lead Portfolio Manager, has been following the options market for nearly two decades, as a way to read the various tea leaves.

 

“The options market provides a range of pricing over a range of time periods, which gives us enough data to be statistically significant,” remarked Brad, when asked how it all works.

 

“When we think about the bell curve, the statistically significant set of data over different potential S&P 500 prices gives us the range of how market participants currently view the market. The center of the bell curve represents a 68% probability, and the remaining 32% of probabilities to be split into 16% on either side of the bell curve’s center, either higher or lower than the most probable expected outcome.”

 

Looking through that lens, currently there is more money betting to the downside in June, September, and December of 2020, and overall the money that is being bet in the S&P 500 options market demonstrates more risk than reward this year.

 

 

 

 

 

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