Yesterday we saw US markets rallies as data supports view that the Fed may be done hiking rates. The S&P 500 is up 1.9%, Dow up 1.4%, and Nasdaq up 2.4%. The S&P 500 and Nasdaq posted their biggest daily percentage gains since April 27 as softer-than-expected inflation data was welcomed by investors.
We’ve asked Momentum’s reaction to yesterday’s significant market movement:
Andrew: We have been saying for a while that we think inflation has peaked already in the all-important US economy and that we will increasingly see this sort of disinflation, along with eventually a fall in expectations for future interest rates, which would result in falling bond yields. That’s exactly what we’ve been seeing in the past couple of weeks and are also seeing in other major economies, including the UK today.
Rather than reacting on this development, we instead positioned portfolios in anticipation of it. We significantly increased interest rate risk / duration across portfolios last month, moving ourselves to an ‘overweight’ allocation on government bonds across all portfolios for the first time in over a decade. Therefore the portfolios have benefited from the sharp decreases we’ve seen in recent days. For instance, one of the bonds we bought across portfolios was the a 2045 maturity Treasury, priced at ~65 and yielding ~5.2% at time of purchase. Today that bond is priced at ~69, representing a 6% return in less than a month, with the yield having fallen to ~4.9%.
We have largely kept our equity allocations unchanged for now, given the level they were at already and the increasingly attractive risk /reward opportunities on offer in fixed income, but as you suggest we will be capturing the associated rebound in equity markets well across our portfolios. The real assets and investment trusts portion of our portfolios has been a particularly strong beneficiary in recent days, with several gaining 15% or more, and some upwards of 30%.
As a result, to the end of last week, so not including the gains this week, most of the Harmony Portfolios are up by 3-4% so far this month.
The sharp moves we’re seeing in markets highlights the critical need to be patient and to adopt a valuation driven approach, so as to be positioned in advance of the eventual recovery, otherwise it’s easy to miss a lot if one waits for the good news to arrive (lower inflation, falling rates etc.).
We see a lot of very good opportunities across many asset classes at present. If inflation continues to fall, and central banks become less hawkish as the market is expecting, then there’s much more recovery potential ahead, which we believe our portfolios are very well positioned for.
It appears that Momentum has been anticipating improved inflation data and they positioned well ahead which benefited their portfolios across the board from yesterday’s market rally. It also highlights the importance of having an ‘active manager’ that captures investment opportunities associated with significant macroeconomic events.
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