Wild Swings

Quarterly Analysis: Markets and Tactical Allocation Portfolio

JANUARY: The stock market started out strong, jumping 8.5%.

Bonds also started out strong, and our primary bond fund, Wasatch-Hoisington US Treasury, rose 6.47% in January. Gold also did well that month, rising 3%. Managed futures finally stabilized after having gone down the previous time stocks rose in mid-October. Combined, TAP gained 1.09% in January.

That month we added 5% to a new (for us) market neutral fund called Federated Hermes Market Neutral. This fund has modest risk and has a great track record in that they can, and have, gone up in both bull and bear markets. For example, in 2021 stocks roared and they gained 22.96%. Then last year stocks fell roughly 20% and this fund gained 9.46%.

Economic Note: What in the world was the stock market smoking in January? I think it was the same notions they had adopted last October, which is that we were going to have either a soft economic landing or – no landing at all. I have no idea how anyone could look at the numbers (especially the Fed’s actions), and come to that conclusion.

FEBRUARY

From the beginning of February through March 13, the stock market proceeded to fall 7.75% – back almost right where it began the year.

The bond market followed suit, as yields on the 30-year bond rose from 3.55% to 4%. This led to losses of 10% in February on the longest Treasury bonds. In TAP our long bonds were “only” 18 years in duration, and after they had fallen 4.85% we sold one-third of them to keep at our target risk level. As bankers throughout the country are now realizing, owning longer-term Treasuries without proper risk control is less than prudent.

Fortunately, managed futures rebounded strongly, with or four funds gaining 3.15% in February.

That month highlighted the value of real diversification. Markets have continued to make big moves up and big down – with no sustained direction. For the month of February, TAP was flat, with our managed futures gains offsetting Treasury, gold and silver losses almost perfectly.

Note to TAP investors: We’re always fine with having flat returns in months when markets go through large, fast shifts. Those are dangerous times for markets and mean little from a trend-following perspective. The goal during those month is to have proper diversification to avoid nasty surprises.

Economic Note: February was a month in which the narrative was completely different than it is today. Throughout that month we all knew the Fed was going to keep raising interest rates as far as the eye could see – or until something broke. Unending rate increases are terrible for both stocks and bonds, and both responded accordingly.

The one risk-controlled exception to inflation-induced losses is managed futures, so they proceeded to make over 3% in perhaps the last month when inflation was again the primary risk we faced. 

MARCH

The third and final month of the quarter was the strangest by far. In the first half of the month, something indeed began to break. Three US banks – plus one of Europe’s largest banks – went under. Investors adopted the classic “flight-to-safety” moves of buying Treasury bonds and gold.  10-Year Treasury yields fell from 4.07% on March 1 down to 3.6% by March 23. This resulted in a huge price gain for those bonds.

For the month, TAP’s longest bonds rose another 3.52% while our ultra-short bond fund (PIMCO Enhanced Short Maturity Active) gained 2.12%

We also saw gold and silver shoot up 5.5%, with gold ending the month at $2,000 an ounce. Obviously investors were scared those banks could be followed by more failures and, potentially, a financial crisis.

Then we have the stock market. Beginning on March 13 it did another 180 degree flip, rising 7% for the 2^nd time in the quarter. The rationale was that the banks which went under were resolved (by FDIC, Fed, Treasury) quickly and successfully so they aren’t likely to be a concern going forward.

At the same time, the bank scare appears to have coincided with inflation numbers cooling somewhat. These two facts together means the Fed will now likely raise rates only one more time – a little .25% at their May meeting. This means the Fed will now have investors’ backs once again – with 5% “wet powder” to lower rates over and over and over – feeding the stock market each time. So over the last 3 weeks the stock market concluded, It’s time to party like it’s 1999!

SUMMARY OF THE ENTIRE QUARTER

Both stocks and bonds each had one and a half great months and one and a half of the opposite in the first quarter. As you would expect, our TAP portfolio was a lot less volatile than the markets themselves. We went up 1.09% in January, were flat in February, and then in March fell 1.34%.

For the quarter, our bonds, gold and silver had strong gains, while our quantitative mutual funds fell back, with our largest asset class, managed futures, dropping 1.31%.

When we look back at this quarter, I believe the only concern an investor should have had is low volatility, i.e. safety. Markets won’t continue to swing wildly and irrationally, and there will be plenty of time to profit as we see who was right about the direction of those markets. 

For our part, I’m so sure the recent stock gains are a mirage that we’re not even trying to profit from stocks. Instead, TAP now has two clear goals: