Will the ongoing debt ceiling debate result in the market plunge the bearish market prophets have foretold?
Stocks headed lower in intraday trading Friday after the White House postponed a planned follow-up to the debt ceiling discussion between congressional leaders and President Biden that occurred earlier this week.
While there hasn't been any publicized change in the hard lines drawn by both Republicans and Democrats, House Speaker Kevin McCarthy quickly clarified to reporters Thursday that Friday's meeting wasn't canceled, but postponed to allow staff members to continue conversations behind-the-scenes before leadership met again. “The White House didn’t cancel the meeting — all the leaders decided it was probably in the best of our interest," McCarthy said.
When asked about the situation in a recent exclusive interview with Action Alerts PLUS, AAP team member Bob Lang said the typical politics are at play and he expects an ultimate resolution, but the potential of a default remains a "worst case scenario."
However, Main Street fears aren't being reflected on Wall Street just yet, Lang said. In the video above, Lang explains what the U.S. dollar, bond markets and volatility tell him about investor sentiment.
Full Video Transcript Below:
BOB LANG: It's hard to imagine, J.D., a worst case scenario here, but the media frenzy is making everyone hysterical. Frankly, the U.S. has always paid its bills in over almost 250 years of our country. Sometimes, they get delayed. A couple of times earlier in the century that happened, but we're not seeing as much worry in the bond market. And that's really what I'm paying attention to, nor in the dollar over this. The dollar is not going crazy down.
The debt ceiling, pretty much this whole debate here, it's all political. Of course, it's casting a pall over the market. But when it's over, I think we can finally move on.
JD DURKIN: All right, let's talk about volatility, the CBOE Volatility Index, better known as the VIX. Some people make affectionally refer to it as the fear index, been a bit of a roller coaster as of late, the VIX now sitting at around 16. But of course, we need some context, some perspective for what that number actually means. Bob, what does that tell you about trading in the days and the weeks ahead?
BOB LANG: Well, the implied move on a VIX that's sitting at 16%, J.D., is that the market would move about 1% per day. That's basically the expectation of the implied move. This week, actually, we saw the markets move about 1% the whole entire week. So it moved about 1/5 of the expected move implied by the VIX.
Putting that another way, if the VIX was priced for what the market actually moved this week, the VIX would be at about four, maybe three. So we're obviously not there. So it's interesting that markets are really complacent right now. They're not really paying attention to fear or worry down the road. They don't see much impediments to markets going up.
But we still have not seen the price action move in tandem with that lack of fear in the volatility market. So I think that dip buyers pretty much have been active of late. And whenever the markets come down as we saw this on Wednesday when the markets came down about 1%, and they rallied right back as the dip buyer stepped in there and picked up the pieces. They've been active.
But what happens when they decide not to enter back into the markets? And markets are going to swoon. Breadth has been awful, J.D. Put call ratios have been on the rise. And the options market here is portraying a much more bearish view going forward.
