Ron Rough, Chief Investment Officer, presents our April video market update and shares what FSA is doing to respond.
April 2023 Stock Market Update Transcript
Hello, this is Ron Rough with a market update video for April. Last year was certainly a tough year for almost every asset class, so it’s been nice to see that in 2023, in the first quarter, most asset classes got off to a decent start. So if we look at the first chart, you can see a variety of asset classes, generally pretty positive. Only commodities had a negative quarter, primarily due to oil prices falling, but that’s understandable because commodities actually had a very good year last year, so they were up double digits last year, so they’re down a little bit this year. Equities and bonds were down double digits last year, and now most of those areas have bounced a little bit. Not a very strong bounce from most of the asset classes. Notice small caps and the Dow Jones Industrial, just very small bounces, but the S&P 500 certainly has gotten off to a good start.
So where are we now in the market cycle? So let’s go to this next slide. It’s a two-year chart of the S&P 500, and so we see 2021, the up year; 2022, down year; and then what we’ve been in the last nine months, which we tend to call a landing or a trading range. So let’s talk about that from our standpoint as technical analyst. Our approach, which is a trend-following approach, tends to work quite well in a rising market. So we often call that here in the office a staircase up. So the market’s generally working their way higher, just like we saw in 2021. In those environments, we generally want to be invested in equities or bonds, and we want to ride that uptrend.
Conversely, 2022, certainly the first half, we would characterize as a down market, or in our local vernacular, in a down staircase. In those environments, we want to be basically out of the market. We want to be in money markets. And what you can see from this chart is for the last nine months, we have been in what we would call a trading range or a landing. So what happens here. In a landing, the market has been in a prior trend – in this case, it was a down market – and now the buyers and sellers are fighting it out. Is there enough impetus to push the market even further down or have enough things improved that we can actually break out to the upside? And we’ve been in this trading range, as I said, for nine or ten months now. So it has just been this back and forth battle, 8-10% rallies on the upside, 8-10% rallies on the downside. That environment is the most challenging for us. And what can we do in these environments?
Number one, we are constantly on the lookout for any areas of the market that might be able to buck that trend and establish an uptrend even though the general market is still in this trading range.
Secondly, we will look for more eclectic, lower risk asset classes to go into. You’ll notice, depending on what strategy you’re in, that we’ve had managed futures funds in the portfolio, market neutral funds, merger arbitrage. These are lower risk, more eclectic strategies, more alternative strategies that we’ll use, again, just trying to find something that can eke out some type of positive return, even if the overall market is flat.
Thirdly, we’ll tend to have more elevated money market positions. Five years ago, that was more challenging because yields on money markets were essentially zero, but now we can get four and a half percent or better on our money market yield, so being in money markets is not a bad place to be. So, it’s the most difficult time for our approach, but those are the strategies that we use to try to look for places to make returns when the overall market is in this back-and-forth trading range.
So let’s go to the last slide just to give you a sense of where the portfolios are. And you can see that we certainly have the portfolios somewhat invested in equities. And as I mentioned, we do have managed futures or merger arbitrage or market neutral funds scattered into some of those strategies, certainly the more conservative strategies. And we do have elevated money market positions. More than likely, as long as we stay in this trading range on the S&P 500, we’re in that 3,700 on the low end and 4,200 on the high end. If we can break out of that to the upside, you’ll see us pull that money market position down across all the strategies because that’ll be giving us evidence we’re breaking into a new uptrend.
Conversely, if we break through on the downside, 3,700, you’ll see cash go back up towards a hundred percent across all those strategies. So hard to tell which way we might break as the year goes by. There are plenty of reasons to expect it could be either way. Are we going into recession at the end of this year, into next year? Can we skirt recession and have a soft landing? That’s the question that investors are trying to answer. And then hopefully once that happens, we can react.
So, that’s all for this update. Thank you for watching.
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