Performance Report: 10/31/2022
All performance data for our strategies is net of all fees and expenses. All performance data for indexes or other securities is from sources we believe to be reliable. All data is as of 10/31/2022.
Investment Strategy
MAP Strategy
S&P 500 Index2
Balanced (AOM)2
Global Balanced2
Oct. Return
0.6%
8.0%
1.6%
0.8%
YTD
(6.2%)
(18.8%)
(16.9%)
(16.7%)
Since Inception1
23.8%
31.4%
4.3%
14.4%
The stock market rebounded quite remarkably in October. The Dow Jones index, which is comprised of 30 stocks, delivered its best monthly return since 1976. Broad-based equity indexes like the S&P 500 and the NASDAQ didn't fare quite as well returning 8.0% and 4.2%, respectively. However, the relentless decline in bond prices continued. The iShares 20+ Year Treasury Bond Fund (TLT) fell 6% and has now declined in 10 of the past 11 months. The largest bond fund by assets, The Vanguard Total Bond Markt Fund (BND), held up better declining just 1.2% but is still down in 9 of the last 11 months. According to CBS Marketwatch, US Treasuries are having their worst year since 1788. And no, that is not a typo.
The declines in bond prices have devastated "balanced" investment strategies. While I'm grateful we have largely avoided the carnage in the bond markets, I sympathize with those who counted on bond positions to bail out their losses in equities.
In October, I trailed the performance of our various benchmarks but our risk-adjusted performance since inception and YTD is still far better than our benchmarks. We trailed this month as our exposure and our volatility have been far less than traditional investment strategies. Over the past two months, the S&P 500 experienced an average move of 8.6% and for AOM it was 3.8%. Over this span, the S&P 500 lost 1.4% and AOM lost 4.5%. Conversely, our average monthly volatility for the past two months was 1.0% and our overall loss was just 0.90%. So our volatility was 1/8th of the S&P 500 and less than 1/4 of AOM but we outperformed both. My approach to risk management is working, now it is time to find a way for our accounts to start appreciating again.
Market Update
The daily volatility in the stock markets has continued at an asinine rate. Intraday swings for SPY have averaged over 2.1% since the beginning of September. A 9.4% monthly decline followed by an 8.0% monthly climb is several standard deviations from normal. Over the past couple of months, there has not been any breaking news that would call for such wild swings, which I find troublesome.
I am not sure what the current volatility in the markets may lead to. But I know it is cause for acute attention. The volume, both up and down, is not all that telling. The volume in October was strong suggesting the rally consisted of significant participation by institutional investors but it was still weaker than September and both September and October had weaker volume than earlier in the year. Thus, volume is not making a case that money is necessarily flowing either in or out of equity markets. This past month, the media started reporting a handful of "the sky is falling" calls by various analysts, which is typically a pretty good contrarian indicator that investors are capitulating (There are always "the sky is falling" calls but the media only reports them near market bottoms). While some media outlets were reporting some dire calls by investment professionals, which is historically a bullish sign, there have not been wholesale liquidations of mutual funds shares, which also typically takes place at market bottoms. Ultimately, there is no definitive evidence pointing to either higher or lower prices in stocks. We are entering a seasonally strong period for stocks and market bottoms tend to happen in the October/November timeframe. But this has become such a well-known phenomenon, it may be that investors piled into stocks in October anticipating an end-of-year rally. When I first entered the business, I distinctly remember being told by experienced brokers "stocks never fall in a Presidential election year" only to have stocks fall in 2000 and 2008. Mr. Market seems to take great joy in making fools of those who rely on past precedence to predict future events.
While stocks experienced a strong month, there doesn't appear to be much hope for bonds anytime on the horizon. Granted, at some point, bond prices should rally as they are deeply, deeply oversold. RSI, which stands for the Relative Strength Indicator, is a commonly used measurement for determining when a security is either overbought or oversold. Any reading below 30 is considered oversold and below 20 is deeply oversold. In October, TLT saw RSI readings near 20 on both its daily and weekly charts which confirms its deeply oversold condition. Often, lower prices will result in capitulation and, thus prices subsequently move higher. But there are times when lower prices feed on themselves and the decline snowballs. In the world of commodities, it is commonly said, "High prices are the cure for high prices," but the inverse doesn't always hold true for equities and bonds.
Speaking of commodities, the MAP is providing buy signals on several commodities, primarily in the ag space. The commodity space has outperformed this year being one of the few bright spots in my investment strategy. Corn, soybeans, and wheat have all traded sideways for a few months. It will be interesting to see in which direction prices break out. When securities trade sideways for a long time, the ensuing move tends to be large.
Other commodities, such as precious metals, sugar, and cotton have declined alongside equities, which is an odd development. With that said, the MAP is generating buys on silver, sugar, and cotton so these hard assets maybe begin to capitulate. If commodity prices move higher, it will further exacerbate inflationary pressures, which is very bad news for the FED. The FED can create money at will but they cannot create any tangible asset like corn or gasoline. They need commodity inflation to cool off. Unfortunately for the FED, inventories of some key commodities are declining at an alarming rate. One commodity in particular trouble is distillates, specifically diesel, which is at its lowest level since the 1950's.
Finally, I'd like to touch on the USD. The USD has appreciated in a remarkable way relative to the currencies of other developed nations. However, it appears the momentum of the USD index is starting to wane. While the USD has appreciated handsomely versus the currencies of developed nations, it hasn't done as well versus the currencies of emerging nations. The Russian Ruble, the Brazilian Real and the Mexican Peso have all held their value very well versus the USD. Granted, I have been calling for a top in the USD index for some time and perhaps I'm just looking to validate my thesis. In October, the USD fell while stocks rose so it is not all that telling. To support my long-term outlook, the USD will need to fall when US equities are falling. If that happens, it will be a clear indicator that the USD is no longer viewed as a "flight to safety". And if that happens, the rules change in a dramatic way. At this point, I don't know if it will happen but I'm watching for it because of how important of a development it will invariably be.
As always, please do not hesitate to call me at 512-553-5151 if I can be of assistance.
Best,
Matt McCracken
1) Inception date of 4/30/2019
2) All benchmark prices are obtained through the Yahoo!Finance website. S&P 500 Index is calculated using the index price. AOM is the iShares Core Moderate Allocation ETF. Global Balanced is calculated using a 40% allocation to SPY, 40% allocation to BND and a 20% allocation to IEFA.