In what will likely be remembered as an epic decision to America’s unions, the Supreme Court ruled 5-4 on Monday – in a decision split along ideological lines – that businesses can force employees into individual arbitration to resolve disputes, virtually eliminating the threat of a class-action lawsuit.
The Washington Post described the ruling as “an important outcome for business interests.” The decision could make life much harder for unions fighting for better conditions and wages.
Justice Ruth Bader Ginsburg called the decision “egregiously wrong”. She argued that individual complaints can be very small in dollar terms, or “scarcely of a size warranting the expense of seeking redress alone.” The justice read a summary of her dissent aloud in the court.
In a comment that broke with the administration’s official view, the National Labor Relations Board argued that requiring employees to waive their right to collective action conflicted with national labor laws. Bodies representing business were united in support of the ruling.
Meanwhile, lower courts had been split over the issue. Two rulings had been issued – two in which appeals courts ruled that such agreements can’t be enforced and a third in which the appeals court said they are valid.
According to the New York Times, the Court had ruled back in 2011 during the AT&T Mobility V. Concepcion case that companies could forbid class actions in contracts with consumers. These contracts typically require two things: That disputes be resolved and claims brought through arbitration.
The justices were asked to determine whether these same conditions apply to employees.
The following chart depicts this election cycle, i.e., the average four-year pattern of the Dow Jones Industrial Average over more than a century. On the left hand side you see the pattern during the election year, followed by the first post-election year. Thereafter comes the mid-term pattern – which is highlighted by a red circle – and lastly the pre-election year pattern.
In the past 116 years the DJIA delivered the strongest performance during election and pre-election years on average. Post-election years typically also managed to generate gains. The mid-terms were typically the weakest time period.
Given that prices on average barely rise in mid-term years, there is obviously a heightened probability of declines. Thus there is a threat of a sizable fall in stock prices in 2018.
JPM writes, any given cryptocurrency faces competition from other cryptocurrencies, posing risks to their individual valuations. Indeed, the market capitalisation of Bitcoin has risen by around $100bn to around $270bn since late November, while other cryptocurrencies have seen a significant increase in market cap from around $130bn to nearly $500bn currently.
Here are the 4 key categories where Goldman sees abnormal volatility going forward:
- The Dow Jones Industrial Average ETF (DIA) returned 28% last year (on realized vol of 7) yet the options market is pricing in that the ETF generates less than half of the return in 2018 on double the volatility (11% / 14.3%, respectively).
- High Yield option investors are also pricing in elevated volatility potential, as well as high level of concern, as suggested by elevated normalized put-call skew levels across tenors. As an example, iShares iBoxx $ High Yield Corporate Bond ETF (HYG) returned 6% last year on a realized volatility of 4. The options market is pricing in the potential for the ETF to trade up or down 7% by January 2019 expiration on a realized vol of 7, double the realized volatility of 2017. A similar setup is seen in the SPDR Barclays High Yield Bond ETF (JNK).
- Consumer Discretionary ETF investors are also positioning for higher volatility in 2018. XLY returned 23% in 2017 on a realized volatility of 8%, generating among the highest Sharpe ratios in our universe. Option investors are pricing in that the XLY returns +/-13% by January 2019, yet realizes a volatility that is 73% higher than what we saw in 2017.
- Options on Technology focused ETF QQQ and the Technology Select Sector SPDR Fund (XLK) are both pricing in the potential to return substantially less returns in 2018 than in 2017 yet the options market is expecting higher volatility for both. January 2019 $160 straddles for QQQ cost 14%, suggesting the options market is pricing in the potential for the QQQ to close up or down by this amount by expiration. This is substantially less than the 33% return that QQQ posted in 2017 on a realized vol of 10%.
To summarize: “Option investors are pricing in BULLISH views in Energy, Staples, and Financials, but BEARISH High Yield and S&P500. We look to skew as a measure of sentiment, and compare 1yr skew today to levels seen over the past five years.”