October 2020
The month was dominated by an overwhelming amount of positive economic news. The dollar volume of Durable Goods manufacturing for August exceeded February’s level by 1.9%. Regional Fed manufacturing reports for September showed increases of 100% to 300% over August’s levels. Perhaps most importantly were the substantial increases in the “6-month outlook” readings that, for some, were the best in the last 2 years. In another sign of confidence, the “new orders” subcomponent of the August Factory Orders report continued to build on the strength of the prior two months. Meanwhile, the housing sector is surpassing all expectations. New Home Sales for August were up 41% over February’s level and up 43% from a year ago. Existing Home Sales for August were up 10.5% year over year. Other indicators are forecasting continued strength: Weekly Mortgage Applications are running 25% to 40% higher than a year ago; the September Housing Market Index set a new record high. Other readings for the service sectors and for retail reported confirming strength. Overseas, China, Germany, UK, India and Brazil were reporting solid economic numbers which were either confirming previous rebounds or demonstrating rebounds. The icing on the cake was the Fed making it clear it was “all in” on supporting the recovery: it will allow inflation to run for some time above its 2% target; it will remain accommodative well into the recovery; and it will not use full employment as a trigger for a preemptive rate hike.
It was this strong economic picture that allowed a sell- off in over- valued technology/internet (Large Cap Growth) while at the same time, a positive rotation into economically more sensitive asset classes (Small Caps, Foreign Developed Markets and Emerging Markets). That persisted until the week ending 9/25. Then the narrative was spun about rising virus cases in the US, UK , France and Spain leading to potential new shutdowns in these economies; despite the fact that we heard that spin after the rise in US cases in June and July which did not result in the dire predictions. For extra good measure, there was renewed uncertainty about President Trump’s reelection. While the S&P 500 was down 0.63% for the week, US Small Caps were down -4.03% and Silver, Energy, Foreign Developed and Emerging Markets were similarly crushed. This action pretty much wiped out the positive rotation of the previous three weeks.
Bonds followed suit with Interest outperforming Credit and Blend by margins of 1 percentage point and greater.
Commodities were uniformly negative with Silver down an irrational -17% as compared to Copper down -0.95%.
The selloff during the week ended 9/25 reversed all the outperformance from the previous three weeks leading all the strategies to trail their proxies. The exception was Tactical Equity which was down a small fraction of its proxies due to positive returns from positions in India, South Korea, US Homebuilders and US Internet Services. For the quarter: the core strategies captured a substantial percentage of their proxies’ gains; Tactical Income registered a loss due to the decline in Energy Pipelines, the yield stood at 7.73%; Tactical Equity’s return exceeded that of its proxies from outsized returns in India, Emerging Market Internet Services, South Korea and US Homebuilders.
Tactical Equity US and FT’s losses were less than the S&P500’s due to defensive sector allocations in Utilities and Staples and economically sensitive sectors Materials and Industrials that benefited from the rotation. For the quarter they captured a sizable percentage of their proxies’ gains.
Tactical Global Balanced trailed its proxies from allocations to Energy related positions and Credit and Blend Bonds. For the quarter, it captured a substantial portion of its proxies’ return due to sector allocations related to technology and internet services, Emerging Markets and Credit and Blend Bonds.
The ultimate cynicism about the virus came from the PAC 12 college football conference when they announced on September 30th, they would grace us with the start of their football season on November 6th, three days after the Presidential election. The PAC 12 includes 4 schools in California, 2 in Oregon and 2 in Washington State. Despite this latest political temper tantrum, the economy is moving forward. The pundits have been surprised at the strength of the recovery. We believe there are two key indicators that tell us the economy will continue to grow even with ongoing select governmental efforts to retard that growth. First are the sentiment indicators. We discussed some in our OVERVIEW. There also was the issuance for September of UofM Consumer Sentiment and Consumer Confidence both of which showed a rise in their “expectations” subcomponent which are giving a major lift to “income expectations”. Secondly, new businesses are starting at the highest rate in 10 years with Employer ID applications at 3.2 million through 9/15/20 compared to 2.7 million at 9/15/19; of those applications, 1.1 million are businesses who tend to hire employees and this number is up +12% year over year, the most since 2007.
These indicators are a huge vote of confidence in the economy and it is that confidence which propels action to take business risk by investing in property and people. We expect that confidence to impact the Presidential election.
Important Disclosures:
Risk Paradigm Group, LLC (RPg Asset Management or RPg) is a registered investment advisor with the U.S. Securities and Exchange Commission (SEC). Tactical Allocation Group (TAG) joined Risk Paradigm Group, LLC and became a division of the firm on July 22, 2016. Additional information regarding Risk Paradigm Group, LLC can be found on our website at www.rpgassetmanagement.com. RPg does not provide tax or legal advice. Please consult an independent tax advisor for additional guidance.
This material has been prepared solely for informational purposes and is not to be considered investment advice or a solicitation for investment. Performance provided is past performance. Past performance is not indicative of future results. Investments may increase or decrease in value and are subject to a risk of loss. As with any investment strategy, there is potential for profit as well as the possibility of loss. No representation or warranty is made that any returns indicated will be achieved. Investors should consult their financial advisor before investing.
Any projections, market outlooks, estimates or expectations of future financial or economic performance of the markets in general are forward-looking statements and are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Actual results or events may differ materially from those projected, estimated, assumed or anticipated in any such forward-looking statements. Information contained herein is as of the period indicated and is subject to change. Any views expressed herein are those of the author(s) at the time of writing and are subject to change without notice.
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References to Indexes: The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the equity performance of larger companies in the U.S. Please note that an investor cannot invest directly into an index.
Risk Disclosures: Concentration, volatility, and other risk characteristics of a client’s account also may differ from the information shown herein. There is no guarantee that any client will achieve performance similar to, or better than, the strategy mentioned herein.
Sources: Bloomberg.
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