Charlie McElligott on How Long the Stock Market Rally Can Go
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Bloomberg Audio Studios. Podcasts. Radio. News. Hey there, OddLots listeners. You are about to hear a very special episode of the podcast. This was recorded live at our June 26th event in New York. We're talking with Charlie McElligot. He is, of course, Managing Director and Cross Asset Macro Strategist for the Global Markets America's Business over at Nomura. We talked to him a

about volatility in the market. What else? Yep. It's been a kind of extraordinary couple of months with stocks basically at all-time highs despite so much going on in the world. What actually explains what's happening? Charlie does a pretty good job. So take a listen. Thank you so much, Charlie, for being here. Awesome to be here. Awesome to see you guys. So I didn't actually see where the market closed today, but we're pretty close. Either we're at record highs or we're very close to it. I didn't actually see. But

it's crazy to me all that's happened in 2025 and like we're sitting here at all-time highs it's not intuitive you have to admit it's kind of weird the um you know i think the message i'm trying to remember the last time i was with you guys but probably the message i was communicating at that time was the the fixation and kind of the dooming with the left tail scenarios yeah and um

as so often is the case when people are not incentivized to see the world burn, which might be debatable to some. Sure. But, and you start seeing, especially with regard to, you know, negotiating tactics and things like that, where you start getting that not quite as bad as feared scenario. Oftentimes there's an impact, certainly with the mechanical stuff that we so often talk about, and you really underprice the less bad outcome.

And there's a mechanical impact. There's a lot of, you know, vol distribution stuff and it creates second order impact, second order flows. I think the most fascinating two points that I would say outside of the, you know, the mechanical flows that we talk about and the volatility component of this is two things. I think back to 2022.

where we had our first kind of inflation-driven macro bear case, right? We just started the tightening cycle. I think there was nine or 10 months in a row of inflation upside surprises with CPI. And the macro bear case for equities at that point was this earnings recession where due to this price shock,

It was going to impact consumption. Top line sales go lower and so on and so forth. What ended up happening is ironically because of the health of the consumer and tight, tight, tight employment with wages at 40 year highs, you ended up actually getting a dynamic where the corporate world operates on aggregate consumption. They operate in the nominal GDP world. And that inflation perversely for the bears was the earnings catalyst for

And all those folks got stopped out in 2023. There is an element of that still to this day right now as it relates to earnings, even though nominal GDP is in a different place to a certain extent, still kind of 5%-ish.

But the other point, too, is that as it relates to the CapEx spending uncertainty story, right? If corporates don't know what they're supposed to do with their cash because of the, you know, the kind of range of outcomes with regards to, you know, where they, where these tariffs are going to end up, the sand in the gears of the global economy. Well, the thought was, of course, you know, if corporates don't know what to be spending on,

And consumers are feeling that impact as well. You're going to get this eventual drag with regards to consumption. You're going to have corporates in a bad place. You either lose the top line sales because consumers are paying through the roof or you have to absorb those costs and your margins go lower. But what corporates have instead done have taken authorized buybacks to all time highs. So we're not spending on, you know, R&D.

We're not spending on hiring or building that new plant. We're going to buy back more stock than ever before year to date. And that, you know, if you look at corporate buyback flows as a source of demand for equities over the past 10, 15 year period, it's a magnitudes, six, seven, eight times magnitudes, largest source of demand. So you've had these two kind of unintuitive dynamics in the market that have actually kept us higher on top of all those kind of vol scaling things that we like to talk about.

So the other thing that's happened is people are back to actually selling vol. So basically betting that, you know, things will stay relatively calm. Why is that happening? It seems like a weird time to bet. There's so many headlines. I think I think selling vol has become a new form of fixed income in a world where bonds are no longer a risk free asset.

Now, that can go wrong so many ways. In this case, the proliferation of premium income overriding strategies within the ETF world, exotic structured products, and more...

I would say, you know, complicated, you know, vol selling strategies like dispersion, things like that. The number of vol suppliers out there, very short dated, it gets dealers stuffed on gamma, I always like to say. And in that sense, you know, particularly with the amount of short dated volatility selling, you know,

when dealers are stuffed on gamma, it compresses the distribution of outcomes, right? If the market's moving higher, you're selling into that. Market's moving lower, you're shock absorbing. The thing that I would say back to that point about, you know, selling volatility is some sort of kind of fixed income product. Back in 2022, with that tightening cycle and all the bear dooming with regards to, you know, we're going to break something.

you know, such a powerful, you know, ultimately over 500 base points of hikes. The trick was that, okay, the Fed is telling you to be short assets. You need to be able to sleep at night. Cash was an asset again.

So, you know, market was down 30 some percent. Bonds were down simultaneously. Did we really sell off that much? Yeah. NASDAQ was, you know, you know, even bigger than that, obviously, because remember, it was like this tech centric growth kind of unwind. But, but,

What ended up happening was that the Fed was trying to create a negative wealth effect. We've talked about that before because they couldn't impact supply side disruption. They could only impact demand side. And by telling you to be in cash, you could sleep at night. Well, guess what? The next year, you missed a 50% rally in the NASDAQ. So what really smart marketers have done is say, well, I'm going to give you price appreciation of equities.

just capped. And off the back of that too, we're going to sell out of the money calls against this. And you get this like little premium income thing. And it's, you know, they're never telling you you're shorting options. The good news is with a lot of these products nowadays, like you're not shorting crash.

You're not shorting downside. But also too, sometimes they're contributing to their own demise in this kind of grinding market where you're stopping into the calls that you've been selling. There's so much going on. I totally forgot that we had such a big sell-off in 2022. I totally forgot that there was like a 50%. Like all of these things like,

Oh, that actually happened. Zooming out, big picture. It seems objectively true. You've been trading a long time. There are so many headlines these days, and they're always changing, and there's just so much to talk about. What is the trading like? Does it feel different these days when we're just facing this constant wall of news? Is there something that changes in the sort of complexion of how people trade?

Well, there's certainly different risk appetite regimes, risk sentiment regimes, where there was a period of time, I remember, in those early discussions on zero DTE options, where generally speaking at that time, coming off the back of meme coins and and that whole YOLO phenomenon, the speculative excess peak of that kind of 2021 Stimmy check driven madness.

That was a very different world where people were kind of like, you know, buying, you know, optionality, creating gamma squeezes, the Reddit boards, Wall Street bets, all that jazz. Now that you're kind of settling into this world, we've been conditioned. We've been conditioned for 15 years of moral hazard, right? Central bankers intervening, obviously politicians now intervening. And this is like,

you know, party agnostic with regards to the fiscal stimulus where it has become conditioned into traders, both retail and institutional, you know, this dynamic where you have to, this is the expected behavior. You have to buy that dip and sell that volume. Right. So you're constantly trying to like kind of

triangulate and kind of sanity check yourself with regards to this reflexivity. And, you know, like August 5th, August 2nd, August 5th last year were really interesting experiment because August 2nd, we finally got that first glimpse at what our market will eventually do this time again, huge VAR event and, you know, within the fixed income space, certainly. And then trickle down to all asset classes from there. It was the first time that labor looked like labor was cracking.

And we had that, you know, four Z score miss and the U rate and two and a half Z score miss and the non-farm payroll print. And that was after a week of already soft labor data. And that was the holy shit moment. Once the consumer goes, this whole, you know, economic miracle goes. And what that then created was this, you know, was this massive dynamic where at the end of that day, everybody said, OK, we're going to do this.

Risk is dicey right now. There's going to be a lot of deleveraging off the back of this realized volatility shock. I want to go home short delta, like short the market, but I don't want to be short vol because vol squeezed. Vol exploded that day. That was both clients and options dealers. The problem was because of all these second order impacts and deleveraging impacts and was that Nikkei on Sunday night opened down 12%.

So that short vol position was going to be so smart because we always reflexively sell that, you know, and you've got to monetize your hedges in like two hours before people start leaning in all that vol supply. The back test says the higher vol goes, the more I have to sell. And that's that sell the vol rip by the, by the dip. Well, those people got their arms blown off, you know, by eight in the morning. And that was the famous like VIX index, uh,

which is a theoretical calculation based on fake bid and offers from dealers, basically. Printed at 63 or whatever it was, not an actual ticking price. But then the VIX future was traded at 38, which is realistic. But those are those scenarios where that conditioning is how things go really wrong because you think you got it figured out and you don't. The most recent example, of course, has been this Trump collar.

dynamic where the market finally figured out what was the human vivix as I call him you know who who you know the volatility of the only one who calls it yeah you're the only one I need it on my coffee mug you know I have these like Nomura coffee mugs with some of my favorite sayings like human vivix would have been a good one to trademark

We'll trade you an Adelaide's mug for a human Vivex numero. That's done. That is done. But he views himself as having a mandate to disrupt the status quo of 80 years of Pax Americana. And that's clearly the approach here. So the prior distribution of outcomes is now out here.

The quick learning from the market, however, after these initial series of vol shocks was that, OK, we found a pain point. You know, markets sold off to such an extent, the interest rate volatility, particularly in the long end, not just stocks. All right. You know, we've activated the Trump put. However, upon those compromises, the market rallies back. It increases his, you know, willingness to then lean back in from a negotiating ploy. So he's basically selling the call to fund the put.

And when you have that collaring effect, you get the opposite dynamic, right? You get this realize of all compression, which is frankly a large part of what the past two months has been. So you're constantly reassessing how everybody thinks you're going to think, which is like you're anticipating the anticipators.

Probably the most pressing concern that I see with regards to the investable quality of our industry is that it's so, so tied to fuel price. So you'll see that as fuel prices rise, our stocks go down and vice versa. It's just very difficult for people to manage through. But we have seen sustained periods of growth over the last decade, and a few of the airlines have done very well. To learn more about the evolution and investment opportunities of the airline industry, subscribe to PGM's The Outthinking Investor.

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So Joe asked you for basically color on the complexion of the market nowadays. And I know you just got back from, weren't you on some sort of crazy epic travel schedule where you flew around the world? Yes. What are you hearing from clients? Like what kind of questions are they asking you? People are so consensually macro bear-ish.

you know, on that stagflationary outcome. You know, and I think like that's one of the tricks. Like it's, you know, at first it was like, okay, you know, let's expect, you know, these early return. Like, mind you, you know, Smoot-Hawley tariff highs, like 90-year tariff highs, right? You know, prior to the Trump 2.0,

the effective rate was 2.4%. We're 17.3% right now as it stands, right? So like, you know, how does that not bleed through to this, you know, eventual price shock or margin compression, all this stuff that hits, you know, consumption. And, you know,

Initially, it was, okay, midsummer. I think part of what's happening right now is that from a corporate perspective as it relates to the consumer is that taco has changed their behavior too. I'm not going to blow up my top line sales and rush to price shock my clients at a time where-

Yeah. So I think there's been a lot of holding off too, as far as, or willingness to even absorb a little bit of that, the, the price, you know, increases that are coming through. And, you know, so it's been getting increasingly uncomfortable. All these left tail, most acute outcomes have, have certainly been mitigated away and compromised away and kind of handed away. The market starts rallying in your face. You're expecting this very bearish outcome. It's starting to hurt.

You've underpriced the right tail. You get a fiscal deal seemingly close to being done, even just today, right? Late in the day, section 899, which is this kind of like, you know, completely. Tracy wrote a bunch about it. Now it's gone. The revenge tax. Is there anything worse than like getting a bunch of work done and then having to trash it? All I'll say is it's good for content. Yes. There we go. Yes, it is. We talk a lot about hypotheticals over the past couple of months. For sure. Yeah. You know, you're well educated with your scenarios.

But like in this case, you know, that was another, you know, this revenge tax escalation. Well, all of a sudden now, you know, cooler heads prevail. That increases the likelihood that the digital tax, you know, stuff with Europe that was an impediment for deals goes, you know, right way. So you've just had like left tails turn right tails and nobody has the exposure on.

There's just so much chronic macrobility. Now, perversely, you're seeing it with stocks. People are getting stopped in. You're buying the highs. You're having to take up your exposure. You're having to take up your nets after fighting it, kicking and screaming and grossly undercapturing the rally. This is when it sets the table for crash. And that's why, as you're forced to get longer, you have to start hedge. You have to start hedging. Do you think right now, I mean, I remember, well, like right now today, would you say there's still a lot, there's a lot of,

discretionary money where people feel like they're underway at the market, where they feel like they're still fighting this dynamic. They're chasing it. And they're still feeling, oh man, every day the stock market goes up. I don't have the exposure I wish I had. Those are the classic buyers or higher. Yeah. And that's still out there. They haven't fully capitulated yet. But it's, you know,

what you're seeing with the market grinding higher every day. And by the way, through the straddle, like this is the interesting thing. I always say like, we can't crash until skew is steep. Skew is a relative measure of kind of downside demand versus upside demand, you know, put skewed, you know, demand for out of the money downside versus out the money downside. Both of those metrics in the past week of it, 100 percentile over the past year, the past year is going on. Right. So, you know,

People are hedged because they are back getting long where things get spicy and when you're hedged that means dealers are you know short downside They're gonna be short gamma short Vega into a sell-off. That's accelerant flow That feeds into the prevailing market momentum the lower that we go the more, you know spot equities You have to sell the higher the vol goes the more of all you have to buy bad scenario It's an accelerant flow in this case

The trick now that's starting to happen, and this is why I feel like we're probably getting closer to a crescendo, is that now you're getting spot, the market up, vol up, and vol of vol going up. And what that's telling me is that, okay, people are actually now being forced to chase into upside, right? And right now part of that- That's our chart for the newsletter tomorrow. Yes. Stocks, VIX, and vol of vol. Spot up, vol up, V vol up. And what that means is that people are being forced to grab into the upside, right?

And that's also feeding this short gamma move to the upside because dealers are short calls now in this, you know, as we hit 6,150, 6,200, things like that. Ultimately, I always like to say when you get spot up vol up in and of itself, it, you know, creates kind of like a melt up, like some sort of kind of, you know, squeeze

squeezy rally on the way up that collapses under the weight of its own delta, like collapses under the weight of the mechanical buying on the way up, the mechanical dealer hedging on the way up, because you need to keep fulfilling that need and demand. People are getting longer. You're finally seeing that dynamic. People are getting longer. That creates the potential de-risking flow on the way down, especially once you're talking about systematic vol scaling strategies that

that as vol goes higher, they have to just sell, you know, unemotionally. But what would be a reasonable catalyst for that to happen? Well, I think the, the near term one has been, you know, the, the fact that, you know, July 8th, the original kind of reciprocal delay that, you know, and you saw a bunch of headlines today saying like, that's flexible, morally flexible. Um,

Big surprise. Let's make a deal. I would say that right now that's kind of like the most obvious one out there that there's still some element of hardball. My view is that that's somewhat overstated, that that is somewhat overstated because he needs to get one big beautiful bill passed fast.

First before that and then potentially you can play the game But the fact that this 899 was removed tells me that they know that getting a deal with Europe is probably you know a larger, you know Impediment to what they're trying to do and that there still is now this new Conditioning in the market where instead of like increasing the rhetoric at the highs, you know Trump is capitulated back into Trump 1.0, which is like, you know run hot right and

He's now and they are best in himself with the headlines out at the end of the day. They're they're trying to squeeze this thing higher.

And financial conditions are easing. The dollar is moving lower. Long and deals have started rallying, ironically, because the market is sniffing a dovish turn within the Fed, including recent comments from people that I don't think would have anticipated necessarily outside of Waller, who's auditioning for the Fed job. And why are they beginning to turn like that? Yes, there's a normalization dynamic with regards to where inflation is now.

We think Jerome Powell is already at two dots for the end of the year. And there's just this modest turn, but they're turning for a reason. They're turning because quits rates and claims are starting to get a little wonky. And as I said, the whole American economic miracle goes wrong

when the consumer cracks and the consumer cracks is what, you know, becomes of, you know, the labor market and, and that's starting to look, you know, precarious about. So I think, I don't think it's going to be a tariff headline necessarily. I think it's going to be, you know, good old fashioned data, a nasty NFP print, you know, that type of a thing. Is that an acute risk now? Probably not. Probably, you know, safe to say, you know,

within by August, you know, we could be getting spicy. And I think there's real Delta, not just of like the first cut in September, but, you know, if that happens, you know, it's not just going to be, you know, 25 bips. Right. So everyone needs to keep shopping, I guess. Yeah. To maintain the rally. Do your duty.

So the thing is, though, this is what bothers me, is everyone sees some of these dynamics. We talk about the labor market weakness all the time. We talk about the fact that due to the tariffs and other factors, the Fed might be a little bit gun-shy or less inclined to cut than it otherwise would have given the set of economic conditions. And I think Powell has sort of hinted at it before that there are conditions. We all can see this. And yet, like...

And yet people keep buying. Like it's sort of there's something intellectually unsatisfying about the entire environment. Well, because like all this seems very true. They're all this like the stagflation risk. There is going to be a cost of tariffs. There is this cyclical slowdown. And yet, you know, it goes back to those, you know, kind of counterintuitive observations that we started off with, you know, where you get so fixated on like the left side that, you know, perversely, the corporate spending uncertainty becomes the biggest source of demand for stocks.

And especially to the market structure stuff, which is just what I always come back to. Once those puts start roasting because the worst case scenario doesn't happen and dealers got to start buying back that short delta and then people start squeezing that short delta as the market starts rallying back, start buying short dated calls and dealers get short those calls and we go short gamma the other way. Those flows and frankly, a world of...

not just this market structure that feeds momentum with leveraged ETFs, the prevalence of options trading, the tail wagging the dog. And I don't even know if I can say tail wagging the dog now. I just think it is the dog. I like that. That's good. Options are the dog. Those type of

real and synthetic gamma effects in the market are, you know, very high impact. And I think at the end of the day, a lot of this is just about career preservation. Yeah. And when you've kind of missed badly on a call people, it feels good. And, you know, in the macro space, like I, you know, I'm super sensitive to this idea. You know, you feel smart to make a bear call because it's rare. Stocks go higher. Yeah.

Yeah, that's right. When you run a back test, and back testing I know is like a four-letter word, but when you run a back test, this happens and contingent on this, and you actually get negative forward returns over a series of average, over a real number of sample set, it's an outlier. The problem is sitting in a negative stance when, again, it goes back to that point, people are not really incentivized to see the world burn, that's going to be a tough thing. So you've got to be dynamic and pragmatic, I think, about these things.

All right. Well, Charlie, let me just say thank you for giving us a couple of swear words to bleep out. It really helps keep our producers on their toes. Thank you.

This has been another episode of the All Thoughts Podcast. I'm Traci Allaway. You can follow me at Traci Allaway. And I'm Jill Wiesenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at Carmen Arman, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks. For more All Thoughts content, go to Bloomberg.com slash All Thoughts, where we have a daily newsletter and all of our episodes.

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