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Inventories have been falling since they were pushed to the brink of a bear market in December. Given the strength of this performance, it's easy to badume that the worst is behind us.
However, a new report from Societe Generale suggests that the blistering volatility of the portfolio that rocked equities at the end of 2018 is here to stay. And for this reason, the caution put by the firm goes against the seemingly voracious appetite of the market for risk.
SocGen believes that the slowdown in economic growth played a more decisive role in the December crisis than most people realize. After all, most of the attention at that time was focused on closing the US government and the ongoing trade war.
Based on the findings in the table below, SocGen seems to have a point. It shows that past cases of high volatility were accompanied by types of sudden economic contractions.
If the chart does not immediately worry you, consider that SocGen sees flagrant parallels between the current situation and those that preceded the last two financial crises.
"The strong loss of economic momentum justifies comparisons with 2000 and 2007 and suggests that calls for recession seem increasingly credible," said Alain Bokobza, head of global badet allocation for SocGen. .
"The expected slowdown in economic growth is the key factor behind the expected shift to high volatility regimes, and these volatility spikes almost confirm that we are at a very advanced stage of the economic cycle."
Read more: Here's why the next recession could be different than the one the United States has ever seen
But SocGen does not hesitate to qualify this downside view, but says that a full-fledged recession is not necessarily imminent. One of the reasons for this is the recent decision of the Federal Reserve to slow the pace of monetary tightening.
"While we believe that the indicator should not be interpreted in the sense that the recession, increased volatility and falling stock prices are necessarily imminent, the risk that such events will occur has increased," he said. said Bokobza.
So, what is the best way to go for an investor, baduming he wants to protect himself from the inconvenience? SocGen says they should adopt long-volatility strategies with low carry costs.
One of these methods would be to purchase forward variance swaps on the S & P 500. These types of contracts are designed to give investors exposure to future volatility without making them susceptible to price movements in the underlying badet. underlying.
"To buy cheap protection now against the risk that the United States will enter recession prematurely would make sense, in our opinion," said Bokobza.
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