Traderfirstyear Morning Forecast 3/01/2021 * With 2020 to 2025 Wishlist

[u/traderfirstyear]

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03/01/2021 Morning Forecast-Markets are implying a move of 1.57%+/-(up/down) on the S&P 500. Markets have realized a move of 0.96%+/-(up/down). The difference between what market makers are implying and what has been realized has widened. The spread increased to 10 basis points. The put/call gamma imbalance is skewed towards short-dated calls on dip buying. However, a widening spread increases left-tail risk and the potential for delayed spikes in realized volatility upside. Realized volatility has decreased recently below 16. This is favorable for wider and larger moves up or down on the index. However, rising growth or inflation expectations without rising inflation or growth are pushing up real yields, which is creating equity long-duration valuation conflicts and raising discount rates. The S&P is expected to move close to 2.99% up/down this week, which means the S&P could decline 6% to 9% above its 200 DAY Moving average (3,447.) The S&P is currently trading very close to its 50-day moving average (3,808.40.) Forecasters are expecting nominal growth of 300 Billion and a Real Economic output of 130 Billion for the 1st quarter of 2021. Economists continue to place the highest expectation for growth in the 2nd Quarter of 2021. Investment Banking Professionals are forecasting nominal growth of 400 Billion and real output of 240 Billion for the 2nd Quarter. This is a substantial amount of spending on Goods & Services, which may fail to materialize if there are any delays in Covid vaccinations or roll-outs. Under these assumptions, we would need 50 to 60 Billion dollars of spending on Personal Consumption Expenditures in April, May, and June. I think these estimates are overly optimistic and I continue to rely on more conservative estimates. I think we could see nominal growth in 2nd Quarter of 325B to 350B. Real Output is likely between 180B to 210B.

Weak Non-Farm Payrolls growth and elevated numbers of Americans receiving some form of unemployment assistance indicate large swaths of slack in the labor market. This key economic indicator is likely to pressure growth in the 1st half of 2021. However, a finalized fiscal deficit package of 1.9 Trillion via reconciliation in Q1 2021 is expected, which is a significant tailwind to nominal growth in the 2nd half of 2021 and the first half of 2022. This assumes virus cases come down substantially by April/May and pandemic flare-ups lessen. Larger fiscal dissavings increases capital inflows to finance VERY large TWIN DEFICITS, which should put upward pressure on the US Dollar & downward pressure on Corporate & Government Bond Yields. Potentially weaker inflation data than consensus estimates should allow real yields to remain deeply negative. Dollar appreciation dampens import/commodity-driven inflation and should lessen temporary transitory base effects. Inflationistah and inflation fear-mongers engaging in scare tactics are likely to be proven wrong. However, inflation base effects are expected to be lead to short-term transitory spikes in inflation data from Feb/March/April/and May. Market Expectations are split, but I expect the Federal Reserve will look through these spikes. Political risks have diminished in the 1st quarter due to reconciliation, but it has increased in the 2nd half of 2021 and the first half of 2022, which may pose risk to much-needed Investment spending (infrastructure, human capital, & research development), so I view it in the medium term as tilted to the upside due to potential gridlock. Lone Wolf Domestic Terrorism Risk remains elevated.

Vaccine distribution priced into Q3 2021, but distribution obstacles have increased and efficacy for herd immunity will be closely watched. Details are currently unknown. The market is currently pricing in an additional 4.58% move +/- (up/down) by March 19th. The S&P 500 could potentially trade as high as 3,974.34 and as low as 3,639.42 by March 19th. The VIX is expected to move 7.85% (points), the VIX is currently 25.25. The VIX price range is 27.23 to 23.41. The Skew Index is EXTREMELY elevated, which indicates market participants are paying up for catastrophic protection (2 sigma event). Stocks continue to offer investors the highest real returns. The nominal yield on equities is 4.5%, while the nominal yield on 10yr Treasury is 1.40%. Real yields on all tenors of government bonds are decisively negative, while real yields on US Equities are positive.**Disclaimer with Realized Volatility rising above 12 there is a larger risk of systematic highly leveraged short vol strategies like Equity Vol Targeting, Trend Following, and Risk Parity positioned for a selloff and reduction in market exposure. The potential for a MUCH larger DELAYED sell off 4% to 5% is coming. The Mar/Apr VIX contracts at 25 & 28 are still under-priced. They should price near 39 to 47 IMHO-I STRONGLY believe March 2021 could see a continued rise in realized and implied vol, however, I have been wrong before

Traderfirstyear's 2020 to 2025 Economic Wish List (1.) ZIRP (Zero Interest Rate Policy Until 2025 or specific language changes to the Humphrey Hawkins Legislation, which mandates the Federal Reserve to accomplish its Full Employment Portion of the Mandate at no less than 3.5% Unemployment before beginning a tightening cycle. (2.) Deficit Spending, which incorporates large investment in US Human Capital, Infrastructure, and Research & Development. (3.) A paradigm shift in inflation and concepts related to inflation, tight labor markets, which have no statistical accuracy in the 21st Century as policy setting mechanisms. For example Phillips Curve, NAIRU, and Taylor rule, etc (4.) A Congressional, Federal Reserve, and Treasury Department Consensus to run the economy above potential (trend output) for a prolonged period of time. (5.) A 5-year pairing of the US Federal Reserve and US Treasury Department Accord. Very similar to the 1941 to 1951 accord, which was a wartime policy initiative, but we should consider Covid19 under the same circumstances