The month of May proved to be a very good if you loved U.S. equities and were in a broad index fund. If you were trying to actively trade or manage a diversified portfolio, it was a very tougher month!
Although you may not be able to tell from the pure performance numbers (see below), May was a month of extremes. First, there were extreme market moves to the upside. Stocks exploded higher in early May riding on the coat tales of Japanese Quantitative Easing and a feeling by the market participants that developed market Central Banks had to do likewise in stealth currency war between the world’s largest economic markets.
Then someone almost overnight flipped on the sell signal in Japan. We woke up to an 8% down opening here in the U.S. Japan is the largest component of the EAFE Index and continued weakness in this country really weighted on the overall index during May. By the way, there still is no economic reason for the destruction in the Nikkei, literally someone decided to sell big on this index in thin overnight trading over several days. This index has had historically low volatility, but I would say an 8% opening decline on the index puts the whole “safe haven” thesis to rest. Here is a link to an interesting article that pins the fast and hard pullback to comments by our own Fed Chairman, which is possible.
About the same time came conflicting stories between what the Federal Reserve Governors were saying in speeches before various groups about further Quantitative Easing and what the minutes to the recently completed Fed meeting stated. In truth with borrowing down and economic activity up in the U.S., the Fed was already planning how it would taper back its QE to infinity. This sent bond yield rising and bond prices plummeting in one of the biggest move in years. The carnage even included high yield bonds, which typically trade with equities. Of course, historically small yield spreads over treasuries didn’t help the high yield sector.
The result, a very bifurcated market as you can see below.
InTrust May Performance
InTrust’s client performance was also a mixed bag for the month. Some clients with pure U.S. equity exposure did quite well. Others with primarily bond exposure realized a pretty decent size loss. Those with very diversified portfolios took performance hits in their bond, foreign equity and commodity holdings. However, they likely made money in U.S. equities, which depending on the allocation, delivered breakeven to slightly negative performance in May.
This is such an unusual market! When was the last time being diversified actually worked against you?
Our active strategies were likewise a mixed bag. Before I highlight them please remember that our core principle for investing is to mix active with more passive buy and hold strategies. It is quite obvious why when you see active manager performance. While up, it is still struggling in this Central Bank focused investing environment.
Our IA Trend Tracker solution returned +.41% in May, not to bad when you consider both the EAFE and High Yield indexes were negative for the month (50% of our allocation). This strategy is now up +5.03% for the year.
Our IA Global Opportunities solution returned +1.16% for May and is up +9.64% year-to-date. This strategy and our Balanced 80 strategy were both hit for 40-50 basis points of return when Japan opened up down 8% on May 23rd (see commentary above).
Our flagship IA Tactical Equity solution returned a loss of –.13% after being up more than 3% early in the month. A pullback in the S&P at month end and a 1.5% hit on the same Japan correction mentioned above really rocked this strategy. Let’s remember though that Japan helped this strategy outperform the past two months so I guess that is some solace. This strategy is still up +10% for the year-to-date period.
Finally, our IA Balanced 80 solution returned +.60% and is up more than +10.25% for 2013. It also was affected by the sell off in Japan as noted above.
Let me remind you that past performance is not indicative of future returns. These numbers are composite estimates after trading costs, advisory fees and all other costs. They are not audited.
If you would like information on our services or any one of our investment solutions, please feel free to reach out to me at 813-253-2388 ext. 222 or at firstname.lastname@example.org.
Market Forecast – June
So with so much action in May, what does June have in store?
First, let me remind you that my forecast is just an educated guess and should not be relied upon. It is just for educational purposes (and fun).
So enough with the disclaimers, here is what we see. First, this market and the U.S. market in particular is very extended. Markets tend to move up and down above and below a simple moving average. If you looked at the S&P 500 relative to a simple 20 period moving average on a weekly chart, you would see it is very extended relative to the moving average of price. This doesn’t mean that price cannot become more extended, but chances are there is a reversion to the mean for the S&P 500 in June. My target is a drop to at least 1600 on the S&P 500 in the month of June.
Longer term, we would not be surprised if stocks took the summer off. I could easily see a repeat of past summers where we decline in June, rally in July and August and get hammered in September or October. So strap on your “big boy pants” because this summer could be a wild one!