This year’s U.S. Thanksgiving was no turkey for investors as the price of pretty much everything, other than energy commodities, moved sharply higher. There were three drivers catalyzing this fifth beta rally during an otherwise tough year for investors: October’s softer-than-expected U.S. inflation data, soothing words from Fed officials, and the positioning of investors. The key question is whether this latest rally is another headfake, or does it constitutes a sustainable bounce off the bottom. Before tackling this question, let’s review the performance of our funds.
Based on the aspiration that the timing of the Fed’s inevitable pivot may occur before year-end, perhaps as early as last week, equities enjoyed a huge move higher during the month of October. Unconvinced that various macro variables had yet to advance from flashing yellow to exhibiting the all-green, our funds remained conservatively positioned. While frustrating to the team in light of the big bounce in equities, given our long-term net returns, we’re cognizant that protecting client capital during this exceedingly rough 2022 has been top-of-mind for our investors. Hence, we will continue to aim to be the tortoise versus the hare. After discussing last month’s results, this note will update our views on the outlook for markets and the positioning of our funds.
In light of the growing stagflationary environment, investors experienced the full brunt of the renewed downside correlation between stocks and bonds during September, historically the worst month of the year. For the first time since 1938, the S&P 500 closed the quarter with a negative return (-5.28%) after earlier rising more than 10% (+14% July through mid-August gain) as breadth turned strongly negative during the last month of the quarter. In fact, to highlight what has become a year-to-date trend, 56.4% of all trading days during 2022 have shown declines for the SPX, including 26.1% of those days featuring declines of at least 1%. Perhaps even more startling, the Nasdaq-100 and long-term US Treasuries are both down by roughly 30% since the start of January and yields on U.S. 10-year bonds hit 4% for the first time since 2010.
Several months ago, investors began to think about stagflation, yet only during the past few weeks have they started to discount the potential for such a nasty outcome into the price of stocks and bonds. Equity indices, including the S&P 500, which had exhibited sharp gains at the start of August, fell hard towards the end of the month. After failing to surpass its 200-day moving average to the upside, the 50-day moving average provided no downside support, as the S&P 500 quickly descended towards 3,900. Once again, the catalyst for this volatility was the latest flip-flop by Fed Chair Powell, as his recent remarks made it quite clear there was no ‘Fed put’ on the horizon.