Daily Brief For April 12, 2023

Could the S&P 500 drop 2% if the CPI is hot?


Short, low-alpha letter. We are working on an in-depth write-up detailing what trades to take and why they are optimal. Enjoy your day, and keep risk in check.

Goldman Sachs Group Inc (NYSE: GS) warns the S&P 500 (INDEX: SPX) could drop upwards of 2% if the consumer price index (CPI) comes in hot.

Graphic: Retrieved from Sergei Perfiliev.

If year-over-year inflation exceeds the previous reading of 6.00%, stocks will likely fall ~2%; Tier1Alpha suggests “we could see between $4 to $7 billion of equities sold off, as … funds will have to de-risk their portfolio.”

If year-over-year inflation meets the consensus of 5.10%, stocks will likely rise; from an options positioning perspective, if fears are assuaged, and traders supply their bets on or hedges against the market direction (i.e., vol falls), this may indirectly add support.

Graphic: Retrieved from SqueezeMetrics. Dealer hedges with the underlying (i.e., stock or future).

CPI and Federal Reserve meeting minutes could clarify how much more policymakers have to go to rein inflation.

Based on the data and policy response, the consensus is that the economy is already entering a recession; GS warns that recession may manifest a spike in volatility during the rest of 2023, Bloomberg reports, noting they prefer hedging equity declines with put spreads (i.e., buy put, sell put below it) and collars (i.e., own stock and sell call to finance put spread). We wonder who has been saying the same thing for weeks.


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