Last week, the S&P 500 fell more than 4%, the Russell 2000 declined
by more than 6% and long-term Treasuries lost 1%. In fact, as I noted
on Twitter this past Saturday, it was the 2nd consecutive week where
the two equity indices fell by at least 4% and long-term Treasuries lost
1%. The only other time over the past two decades that this happened
was earlier this year in June. It’s goes without saying that these are
highly unusual times. The Fed is raising rates even more aggressively
into a steadily deteriorating economy and that’s resulted in some hefty
losses for both stocks and bonds. Both asset classes are down between
20-30% year-to-date. In a garden variety recession, this is the area where
stock prices tend to bottom out - losses in the 20-30% range. It’s in
recessions that are the result of some type of tail risk event that we see
declines in the 40-50% range. Think the financial crisis or tech bubble.
The big question now is will history show that this is a typical recession or
an unusual recession. My money is on the latter, but nobody knows for sure.
We do know that portfolio protection is rapidly on the rise. Put option volume
on the S&P 500 this year is going vertical and investor sentiment is at
historically bearish levels. If you’re a believer that the bottom isn’t yet in and
there’s more downside ahead, it’s time to think of portfolio protection yourself.