The major equity markets (S&P 500, EFA, EEM) are all down year to date, with the U.S. market being down less than the others but still down over 17%. This volatility we see in the markets is higher than we have seen in a while, reflected in the spike in VIX (the CBOE Market Volatility Index). There really has only been one area that has shined year to date, and that is the energy sector. We have owned energy in our Dividend portfolio, Global Equity Momentum portfolio, and our Tactical portfolio throughout the year, dating back to the 4th quarter of 2021.
Bonds have not been able to escape the madness either. The only way to reduce your risk in bonds thus far was to have a short-duration portfolio. The longer-term Treasury ETF (TLT) is down over 20%. This segment of portfolios is often built to help reduce risk in a volatile market. This year, however, bonds have not helped the portfolio at all. In fact, they have even added to the risk and volatility as rates have moved higher. The good news is that we were anticipating that this could happen and reduced our maturities early, positioning in an extremely short duration portfolio all year.
In 2022 the sector that has shined above all others is energy. This sector is positive in a year where all other sectors are flat to negative. The other two sectors that have done better this year are Staples (XLP) and Utilities (XLU). Last year in the 4th quarter, we made this statement: “Moving into 2022, we anticipate continued volatility and potential for further downside while remaining bullish on Energy with an expectation of continued leadership.” This statement has proven to be true this year so far and, with our accompanying shifts, greatly added to the portfolio’s downside reduction.
As we have stated over the past several years, we have been watching three main things: Fiscal policy, Monetary policy, and interest rates. Our views have been that as long as we continue to see Monetary and Fiscal policy easing with rates low, we should see higher prices, but that state has changed. We now have tightening Monetary policy, Fiscal policy is nonexistent, and rates are moving up. These fundamental shifts considered, we believe this correction we are in could last longer than expected.
Monetary policy, Fiscal policy, and Rates are again vital drivers that we watch to give us signals for potential corrections. However, it is harder to identify drivers that signal when markets could turn around. This is why we turn to statistics to give us the potential for better risk-reward entries. Several signals help identify these entry points as well, such as price momentum, sentiment, inflation, and economic growth. Still, the market can and usually does turn around before most economic and fundamental signals turn themselves.
Therefore, we will use these signals as confirmation alongside the statistics to determine multiple entry points as we move forward.
Please see below for further detailed analysis and chart references. If you have any questions or would like to discuss anything mentioned, please do not hesitate to reach out. We appreciate each of you and the confidence you have in us to manage through these turbulent times.
All the best,
Syntal Investment Team