January 10, 2019

The payroll report announced on January 4th may seem confusing to some people. The report revealed that non-farm payrolls surged and wages jumped – the largest year-over-year increase since April 2009 for the latter. Workers seem to be re-entering the work force in large numbers. Markets are taking it well – good numbers certainly fly in the face of all the recession and slowdown fears of late.  
I’m a little surprised that the market was strong following the release of this report – I would have thought that negative numbers would have calmed markets in the sense that poor numbers would have proven jittery investors correct. In other words, it would be like saying, “Look Federal Reserve – markets are getting killed because you’re not paying attention to the fact that things are bad!”  Instead, strong numbers will only serve to empower Federal Reserve Chairman Powell to stay on the war path to further rate hikes.   
So why are markets happy? Powell did make an attempt to sooth nerves by promising that the Reserve Bank is “always prepared to shift the stance of policy and to shift it significantly”.  Perhaps this was all that was needed – a recognition that Powell in fact does care about wounded investors. Alternatively, perhaps it’s just an oversold bounce. Following the market’s worst December performance in 90 years, any good news is of the ‘glass-is-half-full’ variety. In my view, while stocks could technically have some decent bounce in them, this job news merely serves to create more uncertainty over where economies are heading. China and Japan are feeling the brunt of the trade war. The poor earnings and regulatory woes from Apple, Facebook and Amazon are real. It will be interesting to see how January plays out.
For the volatility minded: The VIX is presently at 25, which is about fair considering the movement we’ve been observing in markets. Interestingly, the volatility of volatility index – the VVIX – is at two-year lows. What does that mean? Think of the VVIX as a kind of secondary barometer of fear – a below-the-surface measure. While the VIX represents fear, the VVIX represents how fearful those who trade fear are.
While that may sound confusing to some, suffice it to say that the VVIX is something pure volatility traders watch very closely. It tends to soar when the VIX is volatile itself and we like to see it drop sharply as a sign that calm is returning. The VVIX has indeed dropped significantly recently, but the VIX remains high. To me, that signifies that markets are likely getting used to VIX in the 20s. The new normal for VIX is here, and this higher-volatility regime is likely here to stay. This rally could have some legs, but volatility will remain. 
The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

Share This Article

Next article

Is It Really Just a ‘Glitch’?

Horizons ETFs is a Member of Mirae Asset Global Investments. Commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the "Horizons Exchange Traded Products"). The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing.

The Horizons Exchange Traded Products include our BetaPro Products which consist of our 2x Daily Bull and 2x Daily Bear ETFs ("2x Daily ETFs"), Inverse ETFs ("Inverse ETFs") and our VIX ETF (defined below). The 2x Daily ETFs and certain other BetaPro Products use leveraged investment techniques that can magnify gains and losses and may result in greater volatility of returns. These BetaPro Products are subject to leverage risk and may be subject to aggressive investment risk and price volatility risk, which, where applicable, are described in their respective prospectuses. Each 2x Daily ETF seeks a return, before fees and expenses, that is either 200% or -200% of the performance of a specified underlying index, commodity or benchmark (the "Target") for a single day. Each Inverse ETF seeks a return that is -100% of the performance of a Target. Due to the compounding of daily returns, a 2x Daily ETF's or Inverse ETF's returns over periods other than one day will likely differ in amount and, for the 2x Daily ETFs, possibly direction from the performance of their respective Target(s) for the same period. The BetaPro Product whose Target is the S&P 500 VIX Short-Term Futures Index™ (the "VIX ETF"), which is a (1x) VIX ETF, as described in the prospectus, is a speculative investment tool that is not a conventional investment. The VIX ETF’s Target is highly volatile. As a result, the VIX ETF is not generally viewed as stand-alone long-term investment. Historically, the VIX ETF’s Target has tended to revert to a historical mean. As a result, the performance of the VIX ETFs' Target is expected to be negative over the longer term and neither the VIX ETF nor its Target is expected to have positive long term performance. Investors should monitor their holdings, as frequently as daily, to ensure that they remain consistent with their investment strategies.

*The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF or returns on investment in the ETF. Only the returns for periods of one year or greater are annualized returns.