April experienced more of the same volatility in equity markets that has persisted for most of the year, and as a result, Forge First continued to play things safe, ending another month with positive net returns for investors. Expectations around inflation caused the US 10-Year Treasury yield to briefly touch 3% for the first time in over four years, oil prices increased 7% for the month (making commodities the top performing asset class), and of the 32% of S&P 500 companies having reported more than 75% exceeded expectations. The TSX Total return index generated a 1.8% return for April (-2.8% YTD) and the S&P 500 Total Return Index (US$) was up a modest 0.4% for the month (-0.4% YTD).
It’s no secret that the first quarter of 2018 has experienced significantly more volatility compared to the steady and complacent rise in market indices in 2017. Fears surrounding how many more times the Fed will hike interest rates in 2018 and what that will do to the yield curve, concerns over Trump trade wars, and data privacy issues for “FANG” stocks caused the S&P 500 to encounter its first 10% correction since January 2016 and end its streak of nine quarterly wins, losing 0.8% for the first quarter of 2018. Our closely correlated TSX index lost 4.5% on a total return basis this quarter, making it only the 77th-best performer among its 93 global peers year-to-date.
Our style of long/short investing has served our investors well during the last three months, with each of our funds, Forge First Long Short LP (“FFLSLP”) and Forge First Multi Strategy LP (“FFMSLP”), generating positive net returns in every month so far this year. Please continue reading to get more insight into our macroeconomic view, recap on our funds, and to learn how long/short strategies can reduce volatility in investor portfolios.
We have long suggested that should volatility return to equity markets, our style of long/short investing would begin to prove its mettle. This is exactly what we saw during the month of February, as the spike in US Treasury yields catalyzed volatility (as measured by the VIX index) to spike to levels last seen in 2015, resulting in a monthly loss of 3.0% for the TSX and 3.7% for the S&P 500 indices. Both Forge First Long Short LP (“FFLSLP”) and Forge First Multi Strategy LP (“FFMSLP”) generated positive net returns for the month.
Even the bulls who foresaw additional upside in equities admitted stocks were far from cheap entering 2018. Then, January 2018 delivered stunning upside in US stocks, epitomized by the 15.5% advance in the FANG index, catapulting the S&P 500 deep into overbought territory at 7% and 14% respectively above its 50‑ and 200‑day moving average. Coincidentally, as shown in Figure 2, the frequency that the term “market bubble” appeared in the financial press climbed back to levels last seen during 2006 and many fund managers remained overweight equities...