2022 Mid-Year Market Commentary

Summary

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

All the best,
Syntal Investment Team

Drawdown Analysis

We are currently in a corrective mode in the markets. This can be concerning when you see the value of your portfolio lower on the year. The good news is we have done well in our strategies thus far, and while we don’t like to be down, we are happy with the low downside capture we have been able to achieve this year. We have now turned our thoughts to looking at the potential for tax-loss harvesting, as well as, looking for the opportunity to add back into risk assets. The chart below will give you some history of the market, what type of corrections have happened, and how long it took to get back to positive returns after the correction.

We are currently between the -15% and -20% drawdown. If you look at the chart, the average 12-month performance is between 5.5% and 11.2%. The average 24-month performance is between 17.2% and 19.1%. And the average 36-month performance is between 16.9% and 19.6%. We are getting to levels where the risk-reward ratio is compelling.

Commentary: The S&P 500 led the major markets in performance for 2021. It is down over 17% as of this writing, but that is better than all other major markets. While we do not have a crystal ball, we do expect to see more volatility this year. With that in mind, we reduced our S&P 500 Index holding in our strategic portfolio to the lower end of the range early in the second quarter. 

Commentary: The EAFE Index is also down significantly this year. Continued volatility is the current outlook, and we have reduced our position in this holding to the lower end of the range. 

Commentary: Emerging Markets has had a few bad years as of late, and this year isn’t any different. At some point, this index will give us an opportunity, but at this time, with the “Risk Off” mentality of the market, this is not something we are looking to buy. 

Commentary: The ACWI is a Global Market ETF that is a combination of U.S., Developed International, and Emerging Markets. U.S. Markets are driving this combined index performance. 

As of May 11th, the best performing market YTD is MSCI EAFE (-16.95%), the S&P 500 in second down (-17.05%), ACWI (-17.78%) in third, and MSCI Emerging Markets (-18.81%) fourth. All major indexes are down and within about 2% of each other.

The best performing U.S. sector year-to-date was Energy, with Utilities coming in second and Staples in third. Full U.S. sector performance year-to-date below, with Discretionary and Technology being the worst two sectors. 

The best performing factor for year-to-date was Dividend Growth (DGRO), followed by Low Volatility (USMV). 

Commentary: When rates move up, the prices of bonds move down. This is the longer-term treasury index, and it has moved down over 20% year-to-date as rates have gone up. We have not held any of these bonds this year because we felt we needed to stay on the short side of duration. 

Commentary: This is the U.S. Core Aggregate Bond Index. The duration of this index is shorter than the long-term treasury index above, therefore it is down less at just over 9% year to date. The shorter the duration, the better you have done while interest rates have gone up. 

Commentary: This is the short-term treasury bond index. It has a duration of just under two years. This index is down around 3% year to date. Again, the shorter the duration, the better you have done this year. 

Commentary: Municipal bonds have not been excluded from this downturn in bonds. Year-to-date MUB (Municipal bond ETF) is down just under 10%. While you can see less volatility in the municipal market, the rule still holds true when rates move up, bond prices move down. 

Commentary: We added GCOW to the portfolio in the second quarter of this year. This is a global dividend ETF (exchange-traded fund) that aims to identify companies that can continue to pay consistent dividends through a free cash flow yield screen and dividend yield screen. This was added because we believe high-quality free cash-flowing companies will hold up better in this type of market. 

Commentary: Momentum had a positive first quarter but was the lowest-performing factor year-to-date. The MTUM ETF is in our Strategic portfolio and is complemented by the DGRO, the ETF explained below. We also look for momentum in Syntal Global Equity Momentum as well. While the Momentum Index has done terrible this year, we have been able to outperform in our Syntal Global Equity Momentum strategy. This factor tends to influence our performance in the overall portfolio. 

Commentary: We own DGRO in our Strategic portfolio, and we also have the Syntal Dividend Growth strategy that tracks and looks to outperform the ETF. We believe fixed income yields will continue to be low, so we have added Dividend factor exposure to increase portfolio cash flow while participating in the equity market. We also believe that dividends, in general will be something that investors look to hold while there is higher volatility in the market. 

Commentary: Energy was the best performing sector for 2021 and looks like it could continue that move in 2022. We continue to hold XLE (Energy ETF) this year, and it has done very well for us. We believe that energy continues to be the place to hide and will re-evaluate our thoughts as we move forward. 

Important Disclosure Information: 

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Syntal Capital Partners, LLC [“Syntal]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Syntal. Please remember to contact Syntal, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Syntal is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the Syntal’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.syntal.com. Please Note: IF you are a Syntal client, Please advise us if you have not been receiving account statements (at least quarterly) from the account custodian. Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Syntal account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Syntal accounts; and, (3) a description of each comparative benchmark/index is available upon request.