After 15 consecutive up months, the U.S. stock market finally had a long-overdue correction in February.
The S&P 500 was down 3.6%
Foreign developed markets were down 4.8%
Emerging markets were down 5.9%.
Many times, the markets will retest lows after sharp drops like we saw in February. These 10% draw-downs (pullbacks) are very normal during bull markets and this type of action rarely marks the end of a bull market.
It appears that “volatility is back”.
Our Tactical Income Strategy generated a sell signal on February 12th and shifted us into a defensive position removing us from the high yield space and into short term bonds.
Our Global Momentum Strategy shifted more assets into the U.S. markets. However, longer term, emerging markets still look attractive relative to other markets.
Our Active Analytics Strategy (which is our only faster trading strategy) sold on Feb 9th, bought on February 16th, sold on February 27th and bought again on March 2nd and maintains it’s current leveraged position in the S&P 500.
The .25% rate hike that occurred yesterday was the first move by new Federal Reserve Chairman Jay Powell. Markets tend to test newly appointed chairs early on in their term and this transition from Janet Yellen was no exception. The volatility in February and the current pullback as of this writing (3/22/18) of 2.5%, we are in line with historical reactions to a new Chairman.
As we move forward, will the Fed raise rates 2 or 3 more times this year? What about the combination of rate hikes with the Fed selling off all the bonds they purchased during all the quantitative easing programs implemented after 2008? If the Fed decides to reduce the balance sheet and raise rates at the same time, we are in unchartered territory. This experiment will end badly. We are due for a recession and every recession in the modern day era has the Fed’s fingerprints all over it.
Think back to Alan Greenspan, who in 1987 raised rates before that market crash. That choke-hold on liquidity turned a routine recession into a full on 30% correction and a bear market. In 1998 the Fed was raising rates when Russia ran into default levels on their debt. After the 2000 Dot Com Bubble burst, Greenspan raised rates in May of 2000 and the following two years were a deep recession. What about Ben Bernanke who said in 2007 that there would be no contagion from the sub prime mortgage collapse. Oops!
Not to fret, our active approach to managing risk is designed to help reduce risk. We have track records to back up our process and we have a team of strategists that have seen it all before. Sit back, relax and enjoy the ride.