Volatility Markets Are Complacent | Kris Sidial on Tariff Risk to Stocks, Dispersion Trade, and Margin Risk
Mar 19, 2025
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Kris Sidial, co-CIO of The Ambrus Group, shares his bearish outlook on the U.S. stock market. He argues that volatility markets are underpricing risks related to economic policies. The conversation navigates various trading strategies, including dispersion trading and volatility selling in ETFs. Sidial emphasizes the importance of recognizing margin risk, particularly in market downturns. He also discusses the need for adaptability in investment strategies amid potential economic shifts, including tariff impacts.
Kris Sidial highlights a concerning complacency in volatility markets, where investors are not adequately hedging against potential downturns in the stock market.
The podcast underscores the significant shift towards tactical investing strategies, as passive approaches may struggle amidst current macroeconomic changes and increasing volatility.
Experts warn that upcoming economic policy changes, including tariffs and potential job cuts, could disrupt market stability and challenge existing investor expectations.
Deep dives
Current Market Sentiment and Volatility Outlook
The current sentiment in the market indicates a degree of panic as the S&P has experienced a significant drop from all-time highs. However, there seems to be an interesting discrepancy in the volatility markets, where investors are not preparing for a sharp downturn. Instead, many are engaging in short-term call buying, which suggests an expectation of a market rebound rather than a severe sell-off. Overall, there is a growing sense that the overall structure of market policies is changing, impacting how equities are expected to perform over the next 12 to 18 months.
Hedging Behavior and Risk Management
Typically, a decline in equities would trigger an increase in hedging activity, yet current behaviors show minimal uptick in protective measures among investors. A slight increase in downside hedging has been noted, but it does not reflect the level of concern that might ordinarily accompany an 8% to 10% drop. Investors seem more inclined to bet on a bounce back than to take steps to mitigate potential long-term risks. This unusual behavior suggests a complacency regarding market volatility, which could amplify risks in the event of further declines.
Impact of Policy Changes on Capital Markets
The discussion emphasizes significant upcoming changes in economic policy that could profoundly influence capital markets, including potential job cuts and new tariffs. Such changes provoke questions about their long-term implications for financial stability and asset values, particularly in the stock market. The administration’s push for a 'reset' could challenge prevailing market norms and investor expectations, risking deeper structural disruptions. The narrative around tariffs and government intervention brings a degree of uncertainty that has not characterized recent market behavior.
Comparison to Historical Market Events
Historical patterns reveal that significant market downturns often begin with a period of disbelief among investors, where the implications of policy changes are not immediately recognized. This complacency can lead to a crescendo of panic when conditions worsen, similar to earlier significant market declines. Investors who have been conditioned to expect the market to continuously rise may find themselves unprepared for the unique challenges posed by current dynamics. Understanding these historical precedents may provide crucial insights into navigating the evolving market landscape.
The Shift Towards Tactical Investing
A notable shift appears to be taking place in investment strategies, moving from passive investing to more tactical approaches as the market becomes increasingly volatile. The current environment may favor tactical investors who can capitalize on the dislocation caused by upheavals in policy and market sentiment. Although passive strategies often relied on a steadily rising market, this is no longer a given as macroeconomic changes unfold. As such, strategic adjustments to portfolios will be increasingly critical for long-term investors hoping to weather potential market turbulence.
Kris Sidial, co-CIO of The Ambrus Group, returns to Monetary Matters to share his decidedly bearish view of the U.S. stock market. Kris argues that volatility markets are not sufficiently pricing in the risks of President Trump’s economic policy, and if that if anything, vol traders are expecting a bounce and laying off hedges rather than buying them. Kris also explains the dispersion trade, vol selling in ETFs, index arb, vanna & volga, VVIX, and margin risk. Recorded on March 18, 2025.
