October 3, 2023 —
In an apt metaphor for the month, JFK Airport in New York saw 8 inches of rain last Friday, a record rainfall dating back to 1948, when tracking of such matters started. Indeed, in September, markets were bombarded by a deluge of bad news: inflation fears (despite lower inflation numbers), hawkish Fed rhetoric, a rise in the “higher for longer” interest rate narrative (see this tweet by Bill Ackman for an example), rising oil prices, and general market angst. Responding to this sentiment, U.S. rates were much higher in September, with 10-year Treasury yields finishing the month north of 4.5%. Much of the weak market performance of risk assets in September keyed off this sharp sell-off in Treasury bonds.
Our view of the world is considerably more sanguine than the emergent market narrative. We wrote on Advisor Perspectives that market performance from this stage of the Fed policy cycle has typically been strong. Furthermore, also on Advisor Perspectives, we pointed out that midcap stocks offer a compelling structural opportunity among U.S. equity asset classes, a theme to which we plan to return in the coming months. Finally, we wrote on our Substack page (please subscribe if you want to receive updates in real time) that the emerging higher-rates narrative was not as compelling as the lower-rates counternarrative. But the markets and the media love a bearish narrative and the one that surfaced in September certainly captured imaginations far and wide.
QuantStreet’s core strategy switched out of our international bond position into a small commodities exposure. Otherwise, our portfolio stayed largely the same. Our forecast of year-ahead Treasury returns is attractive at current valuation levels, but the large September sell-off in stocks made them also look more attractive relative to our start-of-September forecasts, resulting in a largely unchanged portfolio outside of the new commodity exposure. We wrote about our energy market views earlier in the year, and fundamentals (tight supply, falling inventories on top of an already deleted Strategic Petroleum Reserve as shown in the next chart) and market technicals (growing non-commercial trader positioning) are now pointing towards higher energy prices as a risk factor.
As always we construct portfolio allocations at each targeted risk level based on our forecasting analytics, as well as our subjective assessment that our models are not missing first-order return determinants. Our clients — across separately managed accounts and model portfolios — can rest assured that we are actively monitoring market developments and are ready to respond when needed.
Please reach out to us at firstname.lastname@example.org with any questions.
(The featured image is thanks to Gary Meulemans on unsplash.com).