Rising oil prices and a steady hand at the People’s Bank of China (“PBoC”) combined to knock fear from the top rung on the asset allocation factor ladder during the first half of March. Mid-month, Yellen’s FOMC turned shockingly dovish. This action accelerated the decline in the US dollar, indirectly assisting the PBoC by weakening its trade-weighted RmB currency, and caused investors to chase stocks, enabling the “bull” to celebrate its 7th anniversary while the VIX closed March at 13.95, down from its year-end close of 18.21...
January’s market volatility continued through the first half of February as fears surrounding oil, China and US economic growth dominated the psyche of investors. However, improving economic data from America plus provocative and suggestive talk from oil producing countries combined to cause stocks to “V-rip” higher during the second half, creating a sense of calm to the casual monthly observer. Amidst this storm, each of the two funds at Forge First generated respectable profits during February 2016.
Wow, wasn’t January a fun month! In my previous commentary, I tabled three potential scenarios for stocks during 2016. My pessimistic scenario saw oil prices staying lower for longer, the duration of which was positively correlated to the rising risk of a market meltdown driven by a heightened probability of a liquidity crisis. I placed a 30% chance of this scenario unfolding, but I didn’t think it would happen during the first two and a half weeks of 2016. Fortunately, we entered January with conservative gross and net exposure positioning, so our funds suffered only modest losses for the month.
True hedge funds proved their worth during 2015, and unless oil producing nations back off from their game of chicken, the value of running a hedged book will only increase in 2016. Markets are running out of good news bullets, hence risks are rising. The longer oil prices remain below $50, the higher the probability that a non-bank financial company or country dependent upon commodity prices catalyzes a negative event for stocks and further flattens the yield curve. In contrast, should markets anticipate $60 plus oil towards the end of 2016, equities will see vicious sector rotation that only the nimblest of managers will be able to capitalize upon. Want to place your bet on where markets go? Not me! While my team has put together a repositioning “play list” for our funds for when the world begins to “reflate”, entering 2016 we’re positioned for defence after delivering a strong year on the offence side of the ledger.