Taleb Warns Investors To Add Tail Risk Hedges
As you may recall, Nassim Nicholas Taleb warned last month that stock market investors should add tail risk hedges. Taleb’s main rationale for hedging tail risk then still applies: namely, the impact of COVID-19 on economy. Michelle Jones summarized Taleb’s rationale this way:
He expects the fears about the coronavirus to plague the economy and the market for a long time. He said even if the pandemic dies down, the virus will still be out there. That means fearful customers won’t be rushing to spend money again. Caution among consumers will still have a negative impact on many industries, he warned.
A Counterpoint To Taleb
One counterpoint to Taleb’s rationale is that despite the market recovery since March, the impact of the novel coronavirus has already been priced in. That may seem counterintuitive, but as Bloomberg’s Joe Wiesenthal pointed out recently, referring to a Barry Ritholtz article, the sectors you’d expect to have gotten hammered by the coronavirus did get hammered by them: department stores, down 62%, airlines down 55%, resorts and casinos down 45%. The market is up primarily because tech companies have boomed. That makes sense when you consider many of them have benefited from COVID-19 lockdowns forcing more people to use the internet to work and shop from home.
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It makes further sense when you consider that major market indexes such as the Dow Industrials and the S&P 500 are market cap weighted, so $1.6 trillion market cap Amazon going up in price has a much bigger impact than, say, $1.5 billion market cap Spirit Airlines languishing.
In Case Taleb Is Right
In case Taleb is right, you may want to add tail risk hedges here if you haven’t done so already. The video below shows a simple way of doing so using your iPhone.