🎙️ Place Your Bets

📈 The bull run since October 2022 keeps chugging into March. The S&P 500 has already registered 16 all-time highs this year — yes, 16! — on pace to snap the record set in 1995.

Since 2013, the benchmark index has hit 363 all-time highs, more than the 327 during the tremendous bull market from 1989-2000.

Whether the market keeps charging higher or not, one thing is certain: The past decade has been a remarkable period of wealth creation for long-term investors.

💭 In case you missed it — we broke down just how strong this bull market looks in our free preview of We Study Markets Pro on Saturday. For more Pro insights, start your 30-day free trial here.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• One of Wall Street’s most infamous trades is back

• The 401(k) as a cash machine

This, and more, in just 5 minutes to read.

Chart of the Day

In The News

🥴 One of Wall Street’s Most Infamous Trades Is Back

You can bet on almost anything in markets if you're clever enough. Typically, people think of this in two basic ways — you can bet on stocks, bonds, gold, bitcoin, etc., to go higher or lower in price.

• In this way, most are confined to the binary realities of either being “bullish” or “bearish.”

In the wild world of “derivatives,” you have many more options for structuring trades to bet on different market dynamics.

For example, using options, you can bet on “volatility,” a measure of the market’s gyrations.

• During market crashes, volatility surges; other times, a lack of major news can leave markets in a lull, suppressing volatility.

Place your bets: You might not be bullish or bearish at all. Instead, you may look ahead and see a U.S. presidential election on the horizon, war in Europe, and disruptive AI technology and think the market will be more volatile than normal going forward.

• In that case, you’d be long volatility, profiting from an increase in the intensity and frequency of significant price moves. But those price swings could go in either direction, so you’re not necessarily bullish or bearish; you just think volatility will increase.
  

• Going short volatility has the opposite effect, with traders betting that things will be comparatively calm in markets.

Why it matters:

As Bloomberg reports, one “infamous” trade is taking over Wall Street, despite its boring nature — short-volatility bets are surging in popularity, allowing investors to earn stable profits so long as the markets remain tranquil.

Vol-mageddon: While ETFs specializing in using options to generate income with short-vol bets have boomed in popularity, quadrupling in two years to a record $64 billion in assets, they aren’t risk-free (shocker!).

• When volatility picks up, losses can quickly compound. Look no further than 2018’s “Vol-mageddon episode,” when fallout from excessive short-volatility bets rippled across markets.
  

• Among the biggest casualties of Vol-mageddon was the VelocityShares Daily Inverse VIX Short-Term note (XIV), whose assets shrank from $1.9 billion to $63 million in a single day.
  

• You might compare these ETFs’ popularity in advance of a contentious Presidential election in November as being similar to “picking up pennies in front of a steamroller,” to quote the old Wall Street adage.

Between the lines: Comparisons to Vol-mageddon aren’t entirely apples-to-apples. These income-focused ETFs relying on short-vol options largely offset those positions with long bets on stocks, meaning $64 billion isn’t entirely wagered just on volatility swings.

• Yet, more reliance on short-vol options suppresses volatility, further attracting investors to the strategy and expanding the implications of a volatile shock.

How did Wall Street find their way back into short-vol bets?

A boom among non-professional investors in so-called zero-days-to-expiration options (0DTE), which expire worthless at the end of the day but can pay off massively on huge price swings—the financial market equivalent of lottery tickets—has pushed Wall Street to take the other side of those trades.

• They sell the options to YOLOers, picking up a small premium when they expire worthless. Of course, they have to make large payouts sometimes, but it’s a good business most of the time.
  

• Financial crises don’t happen during the “most of the time” periods; they occur in infrequent spurts. Whether zero-day options and Wall Street’s short-vol bets will underpin the next crash remains to be seen, though some are ringing alarm bells.

Read more

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🥙 The 401(k) as a Cash Machine in Emergencies

Need extra cash? A growing share of Americans are looking to their retirement accounts. 

Automatic enrollment has never been easier for employees to compound their wealth and become 401(k) millionaires. But the old-fashioned 401(k) is doing something else as an emergency account:

• According to Vanguard, a record number of 401(k) account holders took early withdrawals from their accounts last year for emergencies. About 3.6% of its plan participants pulled money out of their 401(k) to cover expenses, up from 2.8% in 2022 and the 2% prepandemic average.
  

• Of course, retirement plans are supposed to keep Americans invested for decades, the Warren Buffett way. Then, the thinking goes, you enjoy decades of compounding in your retirement years.
  

• Not for everyone, as the cost of housing, groceries, insurance, and child care have soared. Credit card balances are hefty. Bills are way up, too, so people are looking for different ways to pay them.
  

• Meanwhile, values in most peoples’ accounts have risen sharply in the past 15 months thanks to a strong stock market. 

Financial hardship: Emergency distributions hit back-to-back highs in 2022 and 2023, per Vanguard, which has about five million people using its 401(k) accounts. 

The IRS allows early withdrawals for hardship reasons, such as eviction, paying medical or tuition bills, or groceries when there’s no money left in one’s bank account. Without the hardship waiver, you can pull money out of retirement accounts — but you must pay an income tax, plus a 10% penalty if you’re younger than 59 ½ years old. 

• About 40% of Americans who took a hardship distribution in 2022 did so to avoid foreclosure, up from 36% in 2022.
  

• More than 75% of hardship distributions were $5,000 or less.

Why it matters:

The news says a couple of things. Most notable? People are feeling the impacts of high prices.

• Recent changes in federal law are also at play: They loosened the rules governing when people can tap into their retirement accounts for hardship-related reasons. 

Meanwhile, average account balances jumped 19% last year after 2022’s bear market, and many employers offer 401(k) plans. About 59% of companies using Vanguard’s services automatically enroll new hires into 401(k) plans, up from 34% in 2013 (employees can opt-out).

A record 43% of 401(k) participants saved more in 2023 than in 2022.

Read more

More Headlines

🤑 Proposed federal budget hits $7.3 trillion, includes new taxes on the wealthy

💰 Bitcoin soars to $72,000 as UK opens door to exchange-traded products

🚗 Americans live farther away from the office than ever before

🏦 What customers are telling banks they care about this election year

📉 More consumers doubt that inflation will keep falling

🎬 Oscars 2024: Oppenheimer wins Best Picture, among other awards

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Quick Poll

On Friday, we asked: On a scale of 1-10, I’d rate the U.S. economy’s strength as…

— Said a reader, “Disappointing given the benefits of our current economy are not or can not be taken advantage of by middle and lower income wage earners. Inflation is out pacing salary growth and home ownership appears out of reach for potential first time home owners.”

— And, “Seems we're in a good place right now. Would like to see manufacturing grow and the energy sector remain strong in all areas. The world is an uncertain place. It makes sense to be as independent as possible.”

— Added another reader, “Economic indices are strong.”

Go Pro With We Study Markets Pro

On Saturday, we sent out our last free preview of We Study Markets Pro (packed with awesome insights), but if you want to take your investing to the next level with sophisticated research, you can get another 30 days of access to Pro for free.

What’s there to lose?

See you next time!

That's it for today on We Study Markets!

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