Markets have shown remarkable resilience in the face of various challenges this year. Nevertheless, figures including John Hussman and Marko Kolanovic continue to forecast a correction. And while we can all agree the financial sector's corporate culture has evolved quite a bit since the Jordan Belfort era, it’s still worth asking: have these guys overindulged in pessimism and lost sight of reality, or are they really onto something?
Well, fundamental indicators do seem to hint at a potential downturn. For instance, the service sector, which contributes to around 80% of U.S. GDP, saw its business activity index slip to 52.4 points in July. This suggests more than just an economic slowdown; it points towards the looming threat of stagflation.
But wait, isn't inflation on a downswing? Indeed, it is. However, risks of a fresh spike in prices remain, partially fueled by Brent crude climbing back to over $83 per barrel and wheat prices revisiting June's highs.
If prices take off again, it would likely compel the Federal Reserve to raise rates ever further, disrupting the favorable environment that risk assets currently enjoy.
Another aspect worth considering is market overvaluation. At the start of the year, the S&P 500 next-twelve-month P/E ratio stood at 16.65. Now the measure hovers around 19.4, considerably surpassing the 20-year average of 15.5. If similar figures emerge from other MAMAA members like Microsoft, I suspect the market may struggle to significantly surpass the 20 benchmark.
Given the above, you're probably wondering: should we go for puts or calls? I'd steer clear of outright puts. Instead, I'd aim for a slightly negative delta, much like what I'm currently doing with my SPY position.
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