Alternative asset manager offering investment solutions that find a balance between asset protection and capital enhancement.
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Funds Commentary

Alternative Mutual Funds

 
September 2024 Commentary

While the historically challenging month of September (average decline for S&P 500 of -1.2% since 1926) started on the wrong foot (down -4.25%), the trend turned quickly enabling stocks (and bonds) to post another winning month. The intra-day graph below of the S&P 500 (red line, left axis) and long term U.S. bonds (white line, right axis) highlights their flip-flopping correlation, from negative to positive to negative. After the fourth trading day of the month, several items catalyzed the change in investor sentiment.

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August 2024 Commentary

While several variables drove markets down then up during August, the seminal event was the more dovish than expected interest rate guidance provided by Fed Chair Powell at Jackson Hole (JH) on August 23rd. Making it clear the Fed intends to initiate rate cuts on September 18th, Powell enunciated the FOMC is now focused on the employment side of their dual mandate. His language implied the Fed will now be proactive in its attempt to prevent further weakness in the labour market. This was an important pivot in the Fed’s messaging and directionally supportive of a soft-landing economic environment.

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July 2024 Commentary

Interest rates have fallen off a cliff since hitting their recent peak on July 1st, with the yields on U.S. 2s and 10s falling 90 and 70 basis points respectively through last Friday’s close. Weaker growth, softer pricing data and rate-cutting supportive Fed-speak kickstarted the bond rally from which stocks took their cue. Then June’s U.S. CPI print hit on July 11th, triggering a greater than five standard deviation move in the relative strength of the Russell 2000 (small cap index) versus the NASDAQ 100, the largest de-rating since the bursting of the tech bubble in 2000. Hence, the S&P 500 gave back most of its month-to-date gains, finishing with a total return of 1.2%, while the Russell returned +10.2% and Canada’s S&P TSX split the difference, tabling a total return of 5.9%. Likewise, each of our two funds once again generated positive net returns.

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June 2024 Commentary

Post the strong bounce back of equities during May, the combination of deteriorating market breadth and weakening economic statistics in June suggest stocks may enter a choppier period during the summer. Regardless as to whether that implies sideways or negative price performance, strong messaging that the Fed put remains in place, plus the expectation of one last barnburner quarter of earnings from mega cap tech should prevent stocks from experiencing a significant downdraft in the near term.

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May 2024 Commentary

The worries of April were the source of investor happiness during the month of May as thanks to factors that served to stop the rise in U.S. government yields, the S&P 500 recaptured the majority of its April decline. First, the Federal Reserve tapered QT by more than expected, effectively boosting forward 12-month liquidity by US$420B. On this point, we continue to contest Powell’s notion that monetary policy is tight; phooey it is! Sure, rates have gone up but a) the U.S. economy is far less sensitive to interest rates than it was in the past, and b) the ten-year graph below confirms the U.S. continues to swim in a sea of liquidity (70% above pre-COVID levels). We believe this latter fact has played a significant role in boosting the price of assets and U.S. economic growth. Second, the U.S. Treasury’s ‘Quarterly Refinancing Announcement’ (QRA) was in-line with expectations including nominal auction sizes expected to be stable for “at least” several quarters. Finally, U.S. April economic data released in May was softer on growth and inflation, a combination seen as being good for forward rate cuts yet within the context of an economy still growing enough to generate the profits requisite of a S&P 493 (ex-M7) trading at more than 19X forward EPS.

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April 2024 Commentary

Equity markets experienced some payback during April post their strong Q1 performance, as the third consecutive month of higher-than-expected inflation pushed bond yields high enough to damage the price of stocks. Beyond mid-month, stocks fluctuated on a mixed set of economic releases until the one-two punch of a clear enunciation by the Fed that their market “put” remains in place, and April’s softer than expected jobs reports enabled investors to recoup some losses on both stocks and bonds at the start of May.

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March 2024 Commentary

Led by the ‘price momentum’ factor which had its best quarterly performance in 20 years, the S&P 500 exited March posting its 50th consecutive day at least one standard deviation above its 50-day moving average for only the 12th time during the past 100 years. For all the talk of tightened monetary policy, liquidity remains abundant and appears to be a key driver for stocks. The +10.16% YTD price return for the S&P500 can be split between the M7 (37% or 3.76% of the gain from this 29% share of the market) and the S&P 493 (63% or +6.4% from the remaining 71% of the S&P’s total market cap). This more recently balanced return profile is evident from the far right side of the relative strength graph below of the equal weighted SPX to the market weighted SPX. After reviewing the performance of our funds, this note will touch on inflation and the upcoming Presidential election.

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February 2024 Commentary

Markets continued to rock and roll during the month of February. This was driven by liquidity, the belief that decent economic growth will continue and a confidence that the market knows better than the Fed about the future path for interest rates. In this note, we will review the performance of the funds and explain why we remain cautiously net long the markets.

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January 2024 Commentary

During the first month of 2024, analogous to a homing pigeon returning to its roost, the M7 index reverted with a vengeance to the top of the charts, surprising investors who had assumed that market breadth would continue to improve for the 3rd consecutive month. While results from Alphabet Inc. (GOOG.US) and Microsoft Corp. (MSFT.US) account for the one-day reversal shown on the far-right of the one-month indexed price graph below, subsequent earnings from Meta Platforms Inc. (META.US) and Amazon.com Inc. (AMZN.US) more than enabled the domination of market-weighted vs. equal-weighted S&P 500 performance to continue. While we foresee improved market breadth this year, we do not believe small cap stocks (Russell 2000 in yellow) will regain their lustre.

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December 2023 Commentary & 2024 Outlook

The last 12 months marked a year during which most prognosticators were far off the mark with their forecasts for macro variables, yet still made money given the price gains experienced by pretty much everything financial, except for grain, base metal and energy commodities. The year started with broad agreement that 2022’s soaring interest rates could cause recessions in much of the world, inflation would abate (the question was to what degree), and that at 17.6X forward earnings, the S&P 500 was not cheap.

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November 2023 Commentary

There’s little question that last month was a clean sweep for markets (and a notable positive month for our funds as well!) as the price of both stocks and bonds gapped higher as most investors shifted their expectations to rate cuts occurring during the first half of 2024. The U.S. dollar was weaker, credit spreads narrowed to new tights, speculative stocks outperformed high-quality stocks and the VIX Index tumbled to near year-to-date lows.

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October 2023 Commentary

The tug of war between bulls and bears continued during the month of October. Fueled by a still strong jobs market and resilient consumer spending, the U.S. economy sustained its leadership position in global growth. This reality caused markets to increasingly price in the Fed’s ‘higher-for-longer mantra’, although there’s little question that Washington’s relentless bill and coupon issuance has played a significant role in pressing longer term yields higher; another fact not helpful for stocks last month.

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September 2023 Commentary

Clearly equity prices have finally begun to be impacted by the inevitable and now relentless climb in interest rates. The current questions are whether stocks and bonds are fairly priced and how long before interest rates decline from their two-decade highs. This note will include thoughts on these issues, but first let’s discuss the performance of our funds and the attribution across the broader markets.

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August 2023 Commentary

As we’ve often remarked, history rhymes but doesn’t repeat and sure enough, once again, markets remain convinced that the ‘song will remain the same’ this cycle. While both stocks and bonds ‘took it on the chin’ during August until the end of month rally, markets view recent evidence of a softening labour market as a precursor to Fed rate cuts during 2024. At this juncture, this scenario remains a high probability. The questions remain around the timing and extent of rate cuts, the cadence and composition of economic growth, and the subsequent impact on corporate profits and valuation of stocks. This note will delve into these questions, but first let’s recap the performance of our funds.

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July 2023 Commentary

Equities continued to march higher during July as investors became increasingly confident that the forward macro environment would unfold in a manner helpful to stocks. From the Fed shifting its economic outlook to merely a “noticeable slowdown” from a recession to the extrapolation of the recent dovish news on the inflation front affirming big cuts in interest rates next year, the now 4+ month rally in risk assets was maintained. As can be seen from the far-right of the below relative strength graph of growth vs. value, July’s performance exhibited a more equal balance between growth and value indices.

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June 2023 Commentary

The 493 ‘other’ stocks in the S&P 500 gained +3.7% during the first half of 2023, a gain that if predicted six months ago, would have seemed reasonable given the mix of macro variables at the start of January. Instead, the S&P 500 (SPX) generated a total return of +16.9%, fuelled by the 70% expansion in the P:E multiple accorded those other ‘7 macro cap tech’ stocks, with the first US$2T market company, Apple Inc., accounting for ~20% of the total gain in the index. Pundits attribute much of the recent five-week ramp in equities to investors’ thirst to be invested when the Fed is done hiking rates and the excitement radiating from artificial intelligence (“AI”).

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May 2023 Commentary

While the story line for equities evolved during May 2023, the bottom line remained the same, as despite deteriorating market breadth, a handful of macro cap tech stocks enabled U.S. indices to close higher on the month. Hence, the S&P 500 (white line, right axis) exited May matching the price levels of mid-March 2022, back when the Fed initiated its series of rate hikes (red line, left axis). Washington’s end of month debt ceiling and spending agreement, plus the growing belief that a ‘not too hot, not too cold Goldilocks’ economic environment may be unfolding in the U.S. (jobs data last week), undoubtedly played roles in the positive outcome. However, it strikes us that the role of large systematic buy programs should not be underestimated.

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April 2023 Commentary

A mere gently slowing economy and ‘sticky’ inflation combined to cause late April, Q1 S&P 500 (SPX) earnings to print better than recently lowered estimates. This ‘beat’, combined with investor positioning focused on not wanting to miss the traditional ‘Fed is done’ rally, catalyzed the +2.87% surge in stocks during the last two trading days of the month, enabling the SPX to print a 2nd consecutive positive month.

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March 2023 Commentary

A confluence of factors continues to catalyze choppy, rangebound markets as investors strive to determine whether the Fed will be able to bring inflation under control prior to the U.S. economy falling into a recession. The convergence of the two lines inside the yellow oval on the far right of the 60+ year graph below speaks to this dilemma facing fundamental investors. On the one hand, the Fed’s main inflation metric surprised last month (white line, right axis) to the upside, while last week’s ISM Manufacturing Index (red line, left axis) screamed recession.

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February 2023 Commentary

The first two trading days of February for the S&P 500 exhibited the same fear of missing out (FOMO) activity that played a significant role in fuelling the big move higher in stocks during January. Thereafter, slowing inflation (bullish), but not at a fast enough pace (bearish), provided fodder for both the bulls and the bears, keeping equities range-bound until mid-month when a stream of divergent data caused equities to ultimately succumb, giving back roughly half of their January gains.

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