September 28, 2021
Good morning,
I didn’t think I would be writing this morning, but it’s still September, the VIX jumped up overnight as did Treasury yields and Oil. Not good for stocks or bonds – so, here I am. Overnight Futures (the S&P 500 kind) are off 1% an hour before the cash market opens, 10yrTreasury yields have gone from 1.29% to 1.55% in the last four trading sessions including today’s (they trade 23.25 hrs/day), the VIX is up 2pts to 20.5 (minimum threshold to register fear – nowhere near crisis level) and deeply entrenched in this morning’s multi-asset story, crude oil prices are above $80 and climbing (highly inflationary).
Yes, an ugly start to the day. However I believe this is the bumpy road I mentioned last week as the market adjusts to the known catalysts to a drawdown (correction is to severe a term imho); upcoming Fed taper, stalled stimulus talks, economic slowdown, inflation, seasonality, and an uneven recovery from the pandemic. The probability of something worse than a drawdown remains low, not impossible but unlikely. What is more likely in this low interest rate, TINA (There Is No Alternative) environment today, is another severe swing toward cyclicality – large cap growth struggles, small cap value soars (at least on a relative basis).
Worth noting are model changes over the weekend for the non-taxable model in client’s non-taxable accounts. Recall that it is a multi-asset model (stocks,bonds,cash), benchmarked to a 60/40 global index, and rebalanced often (sometimes weekly – hence only for non-taxable accounts). For the first time since March 2020 (the covid market plunge), cash is in the allocation. However, not because of another plunge in the markets but now because of the spike in yields and the likelihood that a zero cash return will be comparatively higher than the likely negative return in bonds. There is a zero bond weighting in the model this week. The overall equity weighting in the model went from 100% for most of this year, down to 84%. Not a crisis weighting but an elevated volatility weighting I would say. Inside equities the model went from zero small cap value weighting (since April) to what is now one of the largest weightings in equities.
Please call me with any questions, otherwise see you tomorrow.
Be well,
Mike