All the talk and rage this summer and fall has been about trying to predict peak inflation and when the Fed will pivot from aggressive hawk to a neutral stance, then eventually dovish by bringing down interest rates.
Market players have a thirst for trying to get ahead of those transitions, but the risk of course is being too early. That risk has caused many people to lose large sums of capital this year. It is very hard to make up for those losses without some much needed help, like Fed liquidity.
While the crowd was trying to predict a pivot by the Fed and crying out for help, they have not indicated any sort of policy change will happen anytime soon. However, we have started to see a few pieces of data that 'could' persuade them to change their view, but there needs to be more to come. Inflation is starting to come down in certain areas, and that is a positive data point.
Market volatility has been on the decline for six weeks, which has me thinking the crowd is starting to pivot well before the Fed. This makes total sense, inflation may be less of an influence in markets as would a recession or worse.
Hence, it appears the worries have shifted from high inflation to economic woes. The Fed predicts job losses will start piling up in 2023, and that has started already this month. Spending patterns remain robust, but that is likely to change when job losses mount.
But if economic woes may trigger selling in the stock market, the volatility in the market is not reflecting this. Why? Because of the known information and data - we hear about it each day, eventually the concept of a recession is beaten into our heads over and over again. Eventually the mind and body just say, "fine, give me the recession...I'll deal with it and move on."
Without surprises there is no need to panic, and hence less reliance on buying protection. It's time to think about the economy and how rate hikes will impact GDP and earnings, not to fret about inflation too much longer. The Fed is engaged and is working on it.